Cash ISAs vs Stocks And Shares ISA

Thinking about investing in an ISA but aren’t sure which one is right for you? Well read on for all you need to know about the differences between cash ISAs and stocks and shares ISAs, and the pros and cons of each to help you decide which option would suit you best.

What is a cash ISA?

A cash ISA is pretty similar to a regular savings account. However, with a cash ISA, there’s no income tax to pay on any interest you earn and you can only pay into one cash ISA in any given tax year. Whereas you can have as many regular savings accounts as you like. There are a few different types of cash ISAs depending on when you want to access your money. These include:

  • Easy access
  • Fixed rate
  • Regular saver

You can also get cash ISAs for children called Junior ISAs or Lifetime ISAs which can help you buy your first home.

Different cash ISAs come with different interest rates and have different rules attached.


How much can you put in a cash ISA?

Cash ISA limits do exist which means the government dictates how much you can save into your ISA each tax year while still enjoying the tax-free benefits.

Currently, per tax year you can put up to £20,000 in an ISA and spread that allowance across any combination of cash, stocks, and shares, lifetime or innovative finance ISA. You can’t pay into more than one type of cash ISA in a tax year.

Advantages Of A Cash ISA 

There are a number of reasons why you might decide that a cash ISA is right for you:

  • They’re super easy to open and understand
  • They’re great for saving in the shorter term, such as if you need access to your money in the next 5 years
  • The interest you earn is tax-free
  • They’re good for higher earners who do not benefit from the PSA (Personal Savings Allowance) at all
  • Your money is protected up to £85,000 per financial institution
  • If you die, your spouse can inherit your ISA without it affecting their own allowance
  • There are lots of different types and providers of cash ISAs to choose from so you can find one that best suits your needs

Disadvantages Of A Cash ISA 

However, some people choose not to open a cash ISA for a variety of reasons:

  • Savings accounts can often pay a higher rate of interest
  • High inflation means your money could be losing value in cash savings
  • Most people can earn up to £1000 in interest on their savings tax-free through their personal savings allowance
  • You’re limited to adding only £20,000 each tax year to an ISA


What is a stocks and shares ISA? 

Stocks and shares ISAs are a way to save money long-term. Sometimes known as “investment” or “equity” ISAs, the money you put into the ISA is used to buy shares, funds and other types of investments. The funds are free from UK capital gains and they’re tax-free.

For a more in depth explanation of stocks and shares ISAs you can read our article, The Definitive Guide To Stocks & Shares ISAs.


Advantages of a stocks and shares ISA

There are a number of reasons that a stocks and shares ISA could be the right investment for you

  • You could potentially get a bigger return compared to a cash ISA
  • You’re able to invest in a wide range of potential investments with tax benefits within stocks and shares ISA including shares, government, and corporate bonds & funds, or investment trusts
  • Your investments are protected up to £85,000 per financial institution should your provider collapse
  • Any growth or income generated within an ISA is tax-free

Capital at risk, the value of investments can go down as well as up, so you could get back less than you invested. 

Disadvantages of a stocks and shares ISA

However, a stocks and shares ISA might not be for you. Here are some disadvantages associated with a stocks and shares ISA:

  • You undertake a higher level of risk than a cash ISA and, you may end up with less than your original investment
  • It’s more of a medium to long term investment so may not be ideal if you’re looking for short term returns
  • Investment ISA providers will charge a fee to look after your money 
  • Your returns are subject to market forces
  • You may not be able to access your money quickly, as the funds could potentially need to be dis-invested


Should I cash in my stocks and shares ISA?

You can cash in your stocks and shares ISA at any time. But you’d only really want to do this if the value of your investments had increased. Otherwise you’d end up losing money. You also need to keep in mind that any withdrawals from stocks and shares ISAs do not enjoy full flexibility of reinvestment. This means that even if you withdraw and reinvest money within the same financial year, it gets added to the annual allowance for the tax year.


Should I invest in an ISA?

Ultimately it’s your money and your choice but it is a great idea to get financial advice before choosing an ISA to invest in or dismissing them completely. Whether you choose to open a stocks and shares ISA or a cash ISA will really just depend on your:

  • specific financial goals
  • personal circumstances
  • timeframe
  • attitude to risk

If you want to you can open both a stocks and shares ISA and a cash ISA and split your £20,000 allowance between the two. But before you make a decision the best thing to do is speak to a professional ISA advisor.


Hilltop’s Finance: ISA Advisors 

If you’re still not sure what type of ISA is best for you, let’s have a chat. We’re independent ISA advisors that can help you make the best decision for you and your future. We even offer an ISA assessment service to give you a thorough understanding of how your current investments are performing, find out your individual circumstances and investigate if there are more suitable products for you on the market. Give us a call on 0161 413 7051 or arrange a callback and we’ll give you a ring when it’s convenient for you

Important information: Our website offers information about investing and saving, but not personal advice. If you’re not sure which services are right for you, please request advice from Hilltop’s independent financial advisers. Remember that investments can go up and down in value, so you could get back less than you put in.

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