Cash ISA vs stocks and shares ISA

Which is the best option for me?


What is the difference between a cash ISA and a stocks and shares ISA?

Stocks and shares ISAs have the same tax benefits as cash ISAs – all returns are free from UK tax. They also have the same yearly allowance, which is £20,000 for the tax year 2024/25. So which one should you choose?

What’s right for you will depend on your circumstances and appetite for risk. Cash ISAs provide an easy way to earn interest on your money, while stocks and shares ISAs aim to generate more significant growth by investing your money in areas such as the stock market.

Choosing an ISA isn’t always easy, and there’s a lot to consider – as we’ll see below.

Bear in mind that the value of investments can go down as well as up. You could get back less than what you put in.

What is a cash ISA?

A cash ISA is perhaps the simplest type of ISA. It allows you to earn tax-free interest on your cash. With a cash ISA, you can usually choose between a variable or fixed interest rate.

A variable rate cash ISA will usually have a lower rate of interest, but will allow you to withdraw money whenever you need to.

A fixed rate ISA may provide you with a slightly higher rate, but you might need to leave your money untouched for a set period of time.

What is a stocks and shares ISA?

With a stocks and shares ISA, your contributions are invested rather than held in cash. Some stocks and shares ISAs will allow you to choose the investments yourself, whereas others are invested in funds that are managed on your behalf.

Cash ISA: pros and cons

As with all ISAs, there are a number of pros and cons  associated with cash options. As well as offering a low-risk way to save, some cash ISAs also allow you instant access to your money, making them well-suited to funding short-term projects.

Due to their low-risk profiles, cash ISAs can also provide an effective way to build rainy-day funds for emergencies – for example, an unexpected bill or sudden loss of earnings. However, cash savings have historically struggled to stay on top of inflation, meaning their buying power has been diminished.

Cash ISA benefits

The benefits of a cash ISA include:

  • A simple way to save
  • Instant access to money with some cash ISAs
  • Rainy-day funds for emergencies.

Does inflation have an impact on cash ISAs?

Because of the way in which interest rates can fall, as well as rise, there is a risk that savings held in a cash ISA may struggle to keep pace with inflation.

In other words, even though your cash balance is steadily increasing, your money may be worth less in real terms as things become more expensive to buy.

For example, in 1980, £1 could buy you three loaves of bread. By the end of 2023, the average price for a single loaf of bread was £1.37. Due to inflation, £1 might not cover a single loaf, let alone three. And in the future, it's likely to buy even less.

You can see the potential impact of inflation on your savings in our handy inflation calculator.

Stocks and shares ISA: pros and cons

While a cash ISA earns you interest on your savings, a stocks and shares ISA aims to provide greater returns through dividends and capital appreciation (the value of your investment going up). As per ISA rules, any potential gains you make from your investment are protected from UK tax.

Like all investments, there’s an element of risk involved. An investment ISA can help your pot grow faster than cash savings, but it does expose you to the risks of the stock market – meaning you may get back less than what you put in.

Bear in mind too that most investment ISAs recommend leaving your funds in place for a minimum of five years, making them best suited for longer term savings. The longer you invest for, the more time your investment has to grow and benefit from compounding (where you’re generating returns on your returns, which can be reinvested).

Stocks and shares ISA benefits

The benefits of a stocks and shares ISA include:

  • Aims to provide greater returns through dividends and capital appreciation
  • Potential long-term investment growth from compounding
  • Historically greater returns over the long term, compared to cash ISAs.

Can I have both a cash ISA and a stocks and shares ISA?

When making your choice, what's right for you will depend on your risk appetite. If it's potential long-term growth you seek, then stocks and shares ISAs have historically outperformed cash savings and might be the right choice for you.

However, If you feel your financial goals would benefit from splitting your money across both types of ISA, there’s absolutely no reason why you can’t.

You can pay into cash ISAs and a stocks and shares ISAs in the same tax year, as long as your total combined contributions don’t exceed your yearly allowance. You don’t get a separate allowance for each type of account.

If you’re still unsure which type of ISA is right for you, it may be best to seek professional advice from a Specialist Financial Adviser from Wesleyan Financial Services, who can provide expert guidance tailored to you.

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