According to a leading trading platform, there is one big reason to opt for a stocks and shares ISA over a cash ISA.
So, with the end of the tax year just days away, let’s take a closer look at when a stocks and shares ISA might be more appealing than a cash ISA.
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Why is the tax year significant when it comes to ISAs?
The last day of the 2021/2022 tax year is 5 April. It’s significant because it’s also the last day you can use your £20,000 ISA allowance in the current tax year. When the new tax year begins on 6 April, the £20,000 limit resets for the 2022/2023 tax year.
Importantly, if you haven’t opened, or added to, a stocks and shares ISA – or any other type of ISA – before Wednesday next week, you won’t ever have another opportunity to use up your £20,000 allowance for 2021/22. This is because any proportion of an ISA allowance you don’t use within a given tax year can’t be carried forward to future tax years.
To put it bluntly, when it comes to the ISA allowance, you must either use it or lose it!
What is the one reason to opt for a stocks and shares ISA over a cash ISA?
Your ISA allowance covers you for all types of ISA. So you have the option of spreading your allowance across different ISA types. For example, you can stash £10,000 into a cash ISA, and then £10,000 into a stocks and shares ISA within the same tax year, if you wish.
However, according to SaxoMarkets, there is one big reason why those hoping to use up their 2021/22 ISA allowance may wish to stick solely with a stocks and shares ISAs. That’s because the trading platform highlights how stocks and shares ISAs are almost certainly a better option for those with a long-term horizon.
According to SaxoMarkets, whether you should choose a stocks and shares ISA over a cash ISA depends on how long you intend to save for. For those with a long-term vision – typically five years or more – the trading platform argues that it’s ‘prudent’ to go with a stocks and shares ISA. That’s because even though a cash ISA is technically risk-free, in real terms, the value of your money will almost certainly be eroded by inflation.
It’s not difficult to see why this is likely to be the case. Right now, the highest interest rate on an easy access cash ISA is just 0.85%. This is well below the UK’s most recent inflation rate of 6.2%.
SaxoMarkets also points to the fact that, historically, stocks and shares have yielded stronger returns than cash. According to its research, between 1926 and 2017, the S&P 500 Index averaged an annual return of 10.22%. This was almost four times higher than the average inflation rate (2.89%) over the same period.
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Is there still time to invest in a stocks and shares ISA?
The current tax year ends on Tuesday 5 April. So, you do have time to open an ISA and still benefit from the 2021/22 ISA allowance.
If you’re keen to open an account ahead of the deadline, take a look at The Motley Fool’s top-rated stocks and shares ISAs.
As with any investing, remember that past performance isn’t a reliable indicator of future returns. Also, bear in mind that when you invest, your capital is at risk. For more need-to-knows, take a look at our investing basics guide.
