Deciding between a stocks and shares ISA and a cash ISA might sound simple. However, it could prove a tricky task, especially if you’re not familiar with the intricacies of these financial instruments.
If you are unsure of the types of ISAs there are and how they work, make sure you visit our article on ISA basics. Otherwise, let’s look at when and why a stocks and shares ISA or a cash ISA could best serve your needs.
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What are you saving for?
Knowing what you are saving for will make your life a lot easier when deciding between a stocks and shares ISA and a cash ISA.
For example, if you’ve landed yourself a side hustle that is earning you some extra cash and you want to make the most of it, then a stocks and shares ISA could be a great option for you, especially if you want to get some exposure to investing. However, if you have a specific goal and a particular timeframe, a cash ISA could serve you better in this instance. This is because it will provide you with a sense of security, without exposing you to the pitfalls of investing.
With that in mind, here are some financial goals and the ISA that could best help you achieve them.
1. Buying a house
This is a pretty important milestone for most people. So you will want to make sure that you have a form of security, which is usually provided by a cash ISA. If you are buying your first home and the property is valued at or under £450,000 an even better option could be a cash lifetime ISA. This will allow you to benefit from a 25% government bonus each year. Just bear in mind that because you can only deposit up to £4,000 a year, this will only work if you are planning to save over a period of time.
2. Retirement savings
This is a lifelong financial goal, so a stocks and shares ISA could help you make the most of it. When you have time on your side, exposure to the stock market could prove to be the best option for greater returns. This is because you can afford to stay invested in order to ride out any market volatility. However, if market conditions are against you, there is no reason why you cannot switch back to a cash ISA. But historically, people who take a long-term investing approach are the ones who come out on top.
If you wish, you can even use a lifetime ISA to fund your retirement. And if you want to get the best of both worlds, you can go for a stocks and shares lifetime ISA.
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3. Saving for a big holiday
This short-term goal is a no brainer, as you can put money aside in a cash ISA whenever you can afford to. Here you can also experiment with different budgeting apps, where you can split your savings into dedicated pots. You can even use the round-up functionality if it is on offer. This will allow you to round up your purchases to the nearest pound and put away the difference. If you’re struggling to put money away, this could be a great, hassle-free way to save regularly and benefit from the miracle of the compounding interest.
4. Trying out investing
A stocks and shares ISA is a great option if you want to get exposure to investing. An added benefit is that the tax wrapper will also save you time to having to deal with all the tax rules. It’s also worth exploring this option if you want to make a better return than you would get with cash ISA. If you decide to go with a stocks and shares ISA, then make sure you don’t exceed your £20,000 ISA allowance.
If you have made up your mind, it’s a great idea to explore the market before the end of the financial year on 5 April. That way you can take advantage of this year’s ISA allowance. Head over to our dedicated comparison pages to find out more about our:
Please note that tax treatment will depend on your individual circumstances and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. You are responsible for carrying out your own due diligence and for obtaining professional advice before making any investment decisions.
