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3 reasons I’m choosing a Stocks and Shares ISA over a Cash ISA for 2020

There are only a few days to go until this tax year’s ISA deadline on April 5. That usually means being bombarded with ISA ads. In previous years, we have rarely been able to miss the advertising on the tube, in newspapers and on billboards from various ISA providers. This year, with the country in lockdown due to the Covid-19 pandemic, you could be forgiven for not noticing.

This does not mean that it is not important to think about your ISA and top it up to the maximum level you can afford before the deadline.

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But if you do not yet have one, it is also time to think about opening one. You can put up to £20,000 into an ISA every tax year and all the gains are tax-free. But first you need to pick which one is most suitable for you. For myself, the choice is between a Cash ISA and a Stocks and Shares ISA. So why am I leaning towards the Stocks and Shares option?

Saving vs investing

A Cash ISA is a great tool for saving for a known future purchase. It acts well as a separate account into which you can put funds to accumulate at the set rate. For example, the Post Office is offering a one-year fixed cash rate at 1.3%. Many offer less than that. I am looking to use an ISA for actual investments so 1.3% or less is no good to me.

If I want to actively grow my funds tax-free and not just passively save, I think the Stocks and Shares ISA is a better call.

Short term vs long term

The Stocks and Shares ISA is designed so that investments I make into it can be free from capital gains tax when I sell them. If the prices of my shares rise (once the coronavirus crisis is over), those gains could be large. And given that my gains are likely to be higher the longer I hold them (one caveat being that past performance is no guarantee of future returns), it incentivises me to hold for the long term. Saving £1,000 on capital gains tax is a lot more efficient than saving £100, after all. By contrast, the low Cash ISA rates are good for saving for a year or two at most for a large purchase. You see, £1,000 compounded at 1.3% over 10 years would still only reach £1,137.87. 

Freedom vs standard

Within a Stocks and Shares ISA, I have a good degree of freedom around what I put in there. Individual stocks are obviously fine, but I can add mutual funds and investment trusts too. This gives me a wide array of companies in which to invest. And I can tailor it myself to the risk level I am happy with. 

With a Cash ISA, there is not much for me to tailor. I can amend my access to my money, for example lock it up for a year. Apart from this, the headline interest rate is the only variable I would care about. And 1.3% (or less) just doesn’t excite me.

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Jonathan Smith and The Motley Fool UK have 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.