An ISA is a type of savings account that allows you to collect tax-free interest on your money. The two most popular types of ISAs are Cash ISAs and Stocks and Shares ISAs. While both types have their pros and cons, here’s why I would transfer my Cash ISA savings into a stocks and shares ISA account.
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What is the difference between a cash ISA and a stocks and shares ISA?
Both a cash ISA and a stocks and shares ISA allow you to collect interest tax-free. The main difference between the two types of savings accounts is the way that interest rates are calculated.
Cash ISAs typically come with a fixed interest rate that is paid out by the provider. Alternatively, stocks and shares ISAs invest your savings. As a result, the interest that you receive from a stocks and shares ISA will depend on the performance of the investments.
This means that the interest rate on a stocks and shares ISA can fluctuate. Whereas, a cash ISA offers a stable rate of interest throughout the year.
Why I’d transfer my cash ISA into a stocks and shares ISA
The guaranteed interest rate of a cash ISA makes it a popular option for savers. However, by choosing this option over a stocks and shares ISA, you could miss out on some excellent benefits! Here are three reasons why I would do it.
1. Long-term benefits
Stocks and shares ISAs provide the same tax benefits as cash ISAs but could have better long-term benefits.
This is mainly due to the fact that stock market growth is traditionally quicker than the growth of interest rates. As a result, the value of stocks and shares ISA may increase more than that of a cash ISA over time.
At the moment, inflation rates are higher than interest rates. This means that the value of your cash savings could be falling. However, the value of stocks and shares generally keeps an upward trajectory! Over time, stocks and shares ISAs tend to see more growth than cash ISAs.
That said, it is always important to note that the market can be volatile, so the performance of stocks and shares is never set in stone. Many savers feel this is a risk worth taking in order to secure potentially higher returns over the long term.
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2. Transferring won’t affect your allowance
Savers are able to pay up to £20,000 into a stocks and shares ISA each year. Luckily, transferring savings from your cash ISA into a stocks and shares account will not eat into your yearly allowance as long as you follow the ISA transfer rules.
Therefore, by transferring your cash ISA savings, you may be able to invest more than £20,000 into your stocks and shares ISA this year. You will also be able to keep the tax benefits of your cash ISA savings after transferring into your stocks and shares account.
3. Stocks and shares ISAs offer the potential to make more money
By swapping your cash ISA for stocks and shares, you could potentially increase your interest rate!
While cash ISAs offer a fixed-term interest rate, the returns provided by stocks and shares ISAs will fluctuate depending on stock performance. If the investments in your ISA portfolio do particularly well, you could end up receiving much higher interest rates than those that are offered by cash ISAs.
This makes stocks and shares ISAs a great option for anyone who can tolerate a little extra risk. Interest rates in the UK are at a low, which means that cash ISAs do not present the same opportunities for interest growth.
However, whilst the performance of stocks could increase, investors must also be aware of the risks that are involved. The value of your stocks and shares portfolio could decrease at any time and cause you to lose money.
If you are unhappy with low interest rates and are in the position to make slightly riskier decisions with your money, it may be worth transferring your cash ISA into a stocks and shares account.
Please note that tax treatment depends on the individual circumstances of each individual 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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
