The end of the personal tax year is on the horizon and, with it, the deadline to make the most of your annual ISA allowance. But should you save in a cash ISA or invest in a stocks and shares ISA?
An individual savings account (ISA) is a way to put money away without paying tax on the growth, returns or interest.
While there are a few different ISAs available for adults in the UK, there are two main types: cash ISAs and stocks and shares ISAs.
Every year the government gives us a tax-free ISA allowance; for the current tax year ending on 5th April 2018, the allowance is £20,000. It’s up to you to decide whether to put your whole allowance into a cash ISA or stocks and shares ISA, or to split it across the different types.
But how do you decide which ISA ‘strategy’ is right for you? In the current climate of low interest rates and rising inflation, cash ISAs are losing value in real terms, so some people are turning to stocks and shares ISAs for potentially better returns.
But it’s not as clear cut as that – here’s a quick overview of the two main ISA types to help you decide for yourself.
Cash or stocks and shares — what’s the difference?
The cash ISA
A cash ISA works like a normal savings account, and most high street banks offer several types.
As long as your cash ISA provider is covered by the Financial Services Compensation Scheme (FSCS), your capital (up to the FSCS limit of £85,000) is protected if your provider goes into liquidation, similar to a standard savings or current account. However, interest rates have been low for some time now, and, with inflation steadily creeping up, the real value of money held in cash is going down. Which is not great news for people saving in cash ISAs.
The stocks and shares ISA
A stocks and shares ISA, on the other hand, is quite different to a standard bank account. With this type of ISA, you’re not saving money – you’re investing it. Stocks and shares ISAs, over the longer term, could deliver a higher return than a cash ISA and you are more likely to keep pace with inflation.
However, there’s no such thing as a free lunch. The price you pay for this potentially higher return is a greater level of risk to your money. As a stocks and shares ISA is an investment, the capital you put in isn’t protected from rises and falls in the value of the underlying assets. This means you can get back less than the amount you originally invested, so you need to make sure you’re comfortable with the risk before committing.
In terms of protection if your ISA provider goes into liquidation, as long as the provider is covered by the FSCS, up to £50,000 of your capital will be protected.
Why would I choose a cash ISA?
Generally speaking, cash is a safe bet for short-term savings.
If there’s a possibility you’ll need cash for an emergency or you’re saving for a specific goal within the next few years, keeping your money in a cash ISA may be a good option.
Why would I choose a stocks and shares ISA?
A stocks and shares ISA offers the possibility of better returns in the long run.
So, if you’re planning for your future, trying to make the most of your money over the longer term, and can accept that you may lose some money, you might want to invest in a stocks and shares ISA.
Use it or lose it
It’s not possible to carry forward any unused ISA allowance from one tax year to the next. So, if you can, it’s best to use your full ISA allowance every year. Whether you invest in stocks and shares, save in cash, or do a bit of both, ISAs are an easy, tax-efficient way to make the most of your savings.
With the personal tax year-end approaching on 5th April, if you haven’t done so already, now’s the time to put your ISA plan into action.
Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice.