A cash ISA is often seen as the safest option but as the cost of living increases it could be eroding the value of the money in your cash ISA if the interest you are earning is eclipsed by the rate of inflation.
With investing in a stocks and shares ISA you are going to have to take some risk with your cash in the expectation that it will grow faster.
Why use a cash ISA?
· Easy to open and simple to understand
· Good if you need access to your money in the next 5 years
· Rates tend to be higher on cash ISAs than with normal savings accounts
· Any interest earned from the money inside is tax-free – you may not be earning over £1000 in interest now but you could in the future
· Your money is protected up to £85,000 per financial institution
· Good for additional-rate taxpayers who earn over £150,000+ and do not benefit from the personal savings allowance PSA
· Good for those with lots in savings who may be reaching or over the PSA
· Protects against tax policy changes in the future
· When you die, a surviving spouse can inherit the tax-free ISA allowance that you’ve built up, without it affecting their own allowance
What are the differences with a stocks and shares ISA?
· Like a cash ISA, its still easy to open and simple to understand & is an easy way to start investing your money.
· Your investments are protected up to £85,000 per financial institution should your provider collapse. NOTE: This does not cover losses from your actual investments
· You may get higher returns over time and the chance of beating inflation than if you left your money in a cash ISA or cash savings account
· Any growth or income generated within an ISA is protected from tax
· You can put up to £20,000 in each tax year
· You can invest in a wide range of potential investments with tax benefits within a stocks and shares ISA, e.g. Shares, Government and corporate bonds, funds or investment trusts
Are stocks and shares ISAs worth it?
Although stocks and shares ISAs carry the risk of you not getting your original investment back, as with all investing, they can offer considerably higher returns over time if you take a longer term view.
The stock markets go up and down. But the longer you stay invested the more time you have to make back any losses. Over the medium to long term you have a good chance of making money which is why we advise to look at stocks and shares ISAs if it is your intention to have the money for investing for 5 years or more.
Which should I choose?
You don’t need to choose between one or the other – you can open both. Each tax year you are allowed to pay into one type of each ISA. So there is nothing stopping you opening two types of ISAs and splitting your £20,000 allowance between the two. We advise to have an emergency pot of cash savings in an easy access cash ISA or regular savings account so that if something goes wrong short term, like the car breaks down you have funds readily available. The recommendation is three to six months worth of outgoings. Beyond this, however, you may want to start looking at alternatives like stocks and shares ISAs.
Working out if a stocks and shares ISA is a better option for you will depend on your:
· goal
· individual circumstances
· timeframe
· attitude to risk
Remember investing is for the long term. If you know you will definitely need the cash in, say, the next three years, perhaps to get married or buy a house, then a cash ISA may be the best option for you.
What do we mean by risk?
In its simplest form, risk refers to the potential for an investor to permanently lose part or all of their capital investment and cash savings or investments due to one or more factors going against them. The rule of thumb is: The more risk you are willing to take, the higher the potential returns – but also the higher the risk you could lose everything.
Some of the key risks present in investing are:
· Market risk – the potential for your investment to fall in value due to adverse economic events that affect the entire stock market.
· Inflation risk – that savings or investments won’t keep up with inflation.
· Default risk – that a company is no longer able to repay its debt to you.
· Liquidity risk – you may not be able to withdraw and liquidate your investment when you need to or would have to accept a much lower price to do so.
· Longevity risk – that you ‘outlive’ your investments and effectively run out of funds to live on.
Is investing worth the risk?
Here are some things to think about when deciding your appetite to risk:
· Think about your timeline. Only invest money that you don’t need for at least the next five years. The longer you can stay in the market the better, to ride out periods of volatility.
· Never invest money you can’t afford to lose. Ensure first that you have a good safety net of savings available to you should you need it.
· Consider your capacity for loss. This means your ability to deal with falls in the value of your investments and the impact on your standard of living.
· Think about your investment goals. For example, are you wanting to pay off debts, fund school fees, or provide a retirement income?
What should I invest in?
The key, as all good investors will tell you, is diversification; don’t put all your eggs in one basket. To lower the risk of losing money with your stocks and shares ISA, it is important to select a mix of assets across different sectors and geographies.
Some of the main asset classes to consider include:
· Equities, also known as company shares. These are typically viewed as the riskiest asset class in the short term but deliver the best longer-term performance
· Bonds – including government and corporate bonds. These are less volatile than equities and can provide diversification
· Cash. This is typically thought to be the safest asset class. However, in a low-interest environment with fears of rising inflation, the value of savings held in cash risks being eroded
· Commodities. The most commonly traded commodities are gold, other base metals and oil, can act as a buffer against a market downturn protect against the effects of inflation
· Property. This can include buying directly or through property investment funds, property unit trusts, and shares in listed property companies
We will offer advice on what mix will suit your needs. For example someone with a very cautious attitude to risk will be better suited with a greater proportion of their fund invested in cash and bonds as they are less volatile. Whereas, an investor with an adventurous attitude to risk will generally be comfortable taking a greater risk and therefore can hold a mix of assets but where the proportion is greater in equities.
Ultimately we’re here to offer our advice as to whether a stocks & shares ISA is right for you. Contact us now for more information.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
