The Motley Fool

Retire wealthy: Cash ISA vs stocks and shares ISA

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A golden egg in a nest
Image source: Getty Images.

If you’re yet to use up your ISA allowance for this year, you’re likely to face a decision over whether to go for a cash ISA or a stocks and shares one.

Risk-Return trade-off

Cash ISAs are simple — they work in much the same way as an ordinary savings account, except they allow you to earn interest without being liable for income tax. You get the security of regular interest, but if the inflation rate is higher than the interest rate you receive, then the spending power of your savings may be eroded.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Over the longer term, investments in the stock market typically produce better returns than cash, often in excess of the inflation rate. However, this comes at a trade-off in the form of added risk — the value of your investment in a stocks and shares ISA can fall, as well as rise, depending on the performance of your investments.

Investment time frame

Choosing between funding a cash ISA and stocks and shares ISA should depend on your investment goals and your own personal circumstances. Generally speaking, if you’re planning to withdraw your investments within the next five years — say for a deposit on a new home, debt repayments or personal expenses, then a cash ISA will usually be a better choice — it is, at the very least, the safer choice.

On the other hand, if you are saving up for retirement which may be decades away, stocks may be better. Although they are riskier — over longer time periods, stocks have a decent track record of growing your capital.

Tax allowances

Personally speaking, given that I don’t expect to use up my personal savings allowance — which is currently £1,000 in interest income per year for basic-rate taxpayers, £500 for higher-rate taxpayers and £0 for additional-rate taxpayers, I would stick with just a stocks and shares ISA.

That’s not to say that I would avoid cash entirely. Emergency cash is an essential part of everyone’s financial plan — this is the money you set aside for unexpected expenses. I would just keep it outside of the ISA, unless I had some unused allowance in a given tax year.

With expected returns likely to be higher for equity investments, the tax benefit of a stocks and shares ISA can often be greater than that of a cash ISA. But which has the bigger benefit to you personally depends ultimately on your own personal circumstances and investment returns. For instance, if you’re a (very) big cash saver or an additional-rate taxpayer, a cash ISA may well give you a greater tax benefit in some years. And there are also the dividend and capital gains tax allowances to consider.

Transfer

If you’re still torn between the two ISAs, then why not consider getting both. There’s nothing stopping you from doing this, and you can decide to move money between the two at a later stage (of course, tax rules may change). Just make sure that you ask your new ISA provider to arrange the transfer, otherwise you may lose the tax-free status of your investments.

That’s because, if your make a withdrawal from your ISA, you don’t reset your annual subscription limit. And remember, there’s a maximum subscription allowance of £20,000 in a tax year, which you can split across all types of ISAs.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.