Stocks and shares or cash?
Saving into an Individual Savings Account (ISA) is a great way to grow your money while maximising your tax-efficient savings potential. Two popular choices are cash ISAs and stocks and shares ISAs. This article delves into the differences between the two.
A cash ISA is much like a traditional savings account, with interest paid on your savings. But with an ISA, you won’t pay tax on any interest your money earns. With cash ISAs there’s also very little risk of losing money. £5,000 in the bank today means you’ll likely have £5,000 or more, in five years’ time. But it’s important to also be aware that if the interest rate you receive is lower than the rate of inflation, your money will lose value in real terms.
For years, the interest rates offered on cash ISAs were very low. But the steep rise in rates since the end of 2021 has made cash ISAs a lot more attractive. That said, cash can generate a lower return than stocks and shares investments over the long term (5–10 years or longer), but stocks and shares are, by their very nature, higher risk than cash.
But if you’re comfortable with this risk to your money and you’re looking to invest for your retirement, a future big purchase, or perhaps to lend your family a helping hand in a few years’ time, you might want to speak to your adviser about the potential benefits of investing what you can in a stocks and shares ISA too. Please remember, We can’t predict the future. Past performance isn’t a guide to future performance and the value of your investment can go down as well as up so you might not get back the amount you put in.
Stocks and shares ISAs
Many financial advisers believe it’s important to have some cash savings to cover everyday expenses, like utility bills, your mortgage and your pension payments. It’s good practice to hold anything from 3 to 9 months’ worth of spending money in reserve, just in case, and cash ISAs can be a secure way of putting your money away until you need it. But when it comes to long term growth potential, a stocks and shares ISA could have a role to play in your financial mix.
A stocks and shares ISA – as it says on the tin – allows you to invest your money in the stock market. Unlike ‘saving’ in a cash ISA, where you earn interest, investing is tying your money to the performance of one or more asset types like equities (shares in a company) or bonds (a fixed term loan usually issued by a company or government), for example. But unlike cash, the value of these assets will go up and down over time, and so will the value of your investments and you might not get back, the amount you put in. So with stocks and shares, it’s important that you’re comfortable with this risk, in return for the potential to earn greater returns than cash over time.
Like cash ISAs, you save paying tax here as well, as you won’t pay capital gains or income tax on any gains you make or dividends your investments receive. However, the rate of return you receive will vary depending on how the investments in your ISA perform, as the value of your investment can go down as well as up. Ultimately, it’s important to remember that investments in equities or bonds carry a higher risk than cash.
With either type of ISA, there’s a £20,000 tax-efficient ISA allowance this tax year (from 6 April 2024 to 5 April 2025). You can hold multiple ISAs, but your total allowance for the tax year remains at £20,000 for all the ISAs you hold. But please remember, tax rules can change and the impact of taxation depends on your circumstances and where you live.
Both cash ISAs and stocks and shares ISAs have their merits. The decision as to which your adviser will recommend often boils down to how much money you need to meet your everyday expenses (with a pot put by for the any unexpected needs), your attitude to risk and the amount of time you want to put your money away.
If you’re only looking to save for a short period of time (one to five years), your adviser might recommend a cash ISA as the way to go. Likewise, if you want to know for sure how much interest you will earn over a particular period, a fixed-rate cash ISA could be an option too.
If you’re able to invest your money over the long term, your adviser may suggest a stocks and shares ISA, where your savings have the potential to achieve greater returns than cash over a longer period of time – depending on what you invest in. But there’s also the risk that the value of your investments could go down as well as up and you could lose money.
Can I invest in both?
That’s a viable option too. Your adviser may recommend a ‘mix and match’ approach, to diversify your money by spreading your allowance between both a cash and a stocks and shares ISA. So it makes sense to speak to them about all the options available to you.
Need some expert guidance?
The views expressed here should not be taken as a recommendation, advice or forecast. If you’d like to talk through your ISA options this tax year, based on your specific circumstances, please don’t hesitate to contact your financial adviser.
