As we fast approach the end of the tax year, we are well and truly into ISA season. If you have tapped out your ISA allowance for the year, you may be in the market for a new tax-efficient wrapper to help your savings. But the question on everyone’s lips is cash or stocks & shares? We take a look at all the ISA benefits for whatever your savings needs.
What are the benefits of having an ISA?
The benefits of an ISA are very simple: tax-free savings. If you are saving or investing, the likelihood is that you want to take advantage of the interest you earn on your account. You don’t want a portion of it siphoned off by the taxman.
The importance of an ISA has changed over the years. Since the introduction of the personal savings allowance, the average saver may not necessarily see the advantage. But even with the personal savings allowance, there are still some key benefits that only an ISA can offer you.
Benefits of a cash ISA
- The interest you earn on your savings is completely protected from any sort of tax. So unlike the personal savings allowance, where basic rate taxpayers can earn up to £1,000 of interest tax free, there is no limit on your tax-free interest earnings.
- There are a variety of different account options. It’s not one-size-fits-all. You have the pick of easy access, fixed or regular cash ISAs. Each offers something the other doesn’t, so it’s a case of picking one that suits your savings needs. But the one thing they all have is that tax-free status.
- It is relatively easy to access your funds with a cash ISA. You will just need to make sure that you choose a flexible ISA, like an instant access account.
- You can transfer funds to another provider if you want. So if you spot another ISA with a better interest rate, you can make the switch without affecting the tax-free status of your savings.
- It’s less risky than a stock and shares ISA. The interest rate may change, but there is no danger that you could get back less than what you originally deposited.
Benefits of a stocks and shares ISA
- A stocks and shares ISA is a great way to make tax-efficient investments. While there are various tax-free allowances when it comes to investing anyway, the protection from the ISA wrapper is permanent. So if you are growing your funds over a long period of time, your investments will keep a tax-free status with an ISA.
- There is no risk of being charged capital gains tax, tax on bond interest or tax on dividend income.
- You stand to potentially make larger returns with a stocks and shares ISA. Investing comes with risk, but if you play a long-term game, then you give yourself room to smooth out any ups and downs. In the current low interest rate environment, you could see your savings grow more in the long run than you would with a cash ISA. Just remember though, there are typically platform charges or account management fees that need to be paid.
Whatever your position, saving into an ISA can be a good move. It gives you the potential to save up to £20,000 completely tax free.
With a cash ISA, you have your pick of the type of saving account you want, and you avoid the risk that comes with investing. However, the likelihood is that you won’t earn that much interest as cash savings rates are pretty low at the moment.
When it comes to a stocks and shares ISA, you could potentially earn greater returns over a long period of time. But you will most likely have to pay platform and account management fees.
No investment is without risk, so bear in mind that you could get back less than you put in.