Is a cash ISA really right for you?

Lisa Caplan

read 4 min

The end of the personal tax year is on the horizon and, with it, the deadline to make the most of your annual ISA allowance. But should you save in a cash ISA or invest in a stocks and shares ISA? 

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

Firstly, it’s worth clarifying that yes, you can have more than one ISA and yes you can pay into a cash ISA and a stocks and shares ISA. However, your ISA allowance of £20,000 a year will cover all your ISAs. So, the total untaxed amount invested per year in all your combined ISAs cannot surpass £20,000. For example: if you invested £12,000 in your cash ISA, you would only have £8,000 left to invest tax-free in your stocks and shares ISA. Also, you’re only allowed to pay into one of each type of ISA each tax year. This means that you can pay into a cash ISA and a stocks and shares ISA in one year, but not into two different cash ISAs. 

Thinking about your ISA strategy can not only put you on a solid financial footing for the 2019/20 tax year, but for the next one too.  

Get your head around the pros and cons of a stocks and shares ISA versus a cash ISA and you could well be in a position to ‘set and forget’ – by which we mean you can do what you need now and not worry yourself for the next 12 months or more 

First the basics: An individual savings account (ISA) is a way to save or invest without paying tax on the growth, returns or interest. 

While there are a few different ISAs available for adults in the UK, there are two main types: cash ISAs and stocks and shares ISAs.  

Every year the government gives us a tax-free ISA allowance; for the current tax year ending on 5th April 2020, the allowance is £20,000. It’s up to you to decide whether to put your whole allowance into a cash ISA or stocks and shares ISA, or to split it across the different types. 

But how do you decide which ISA ‘strategy’ is right for you? In the current climate of low interest rates and rising inflation, cash ISAs are losing value in real terms, so some people are turning to stocks and shares ISAs for potentially better returns. 

But it’s not as clear cut as that – here’s a quick overview of the two main ISA types to help you decide for yourself. 

Cash or stocks and shares — what’s the difference?

The cash ISA 

A  cash ISA  works like a normal savings account, and most high street banks offer several types. 

As long as your cash ISA provider is covered by the  Financial Services Compensation Scheme  (FSCS), your capital (up to the FSCS limit of £85,000) is protected if your provider goes into liquidation – similar to a standard savings or current account. However,  interest rates have been low  for some time now, and, with inflation steadily creeping up, the real value of money held in cash is going down. Which is not great news for people saving in cash ISAs.  

The stocks and shares ISA 

A stocks and shares ISA, on the other hand, is very different to a standard bank account. With this type of ISA, you’re not saving money – you’re investing it. Stocks and shares ISAs, over the longer term, could deliver a higher return than a cash ISA and you are more likely to keep pace with inflation.  

However, there’s no such thing as a free lunch. The price you pay for this potentially higher return is a greater level of risk to your money. As a stocks and shares ISA is an investment, the capital you put in isn’t protected from rises and falls in the value of the underlying assets. This means you can get back less than the amount you originally invested, so you need to make sure you’re comfortable with the risk before committing. 

In terms of protection if your ISA provider goes into liquidation, as long as the provider is covered by the FSCS, up to £85,000 of your capital will be protected. 

Why would I choose a cash ISA? 

Generally speaking, cash is a safe bet for short-term savings. 

If there’s a possibility you’ll need cash for an emergency or you’re saving for a specific goal within the next few years, keeping your money in a cash ISA may be a good option. 

Why would I choose a stocks and shares ISA? 

A stocks and shares ISA offers the possibility of better returns in the long run. 

So, if you’re planning for your future, trying to make the most of your money over the longer term, and understand there are risks associated with investing, you might want to invest in a stocks and shares ISA. 

Use it or lose it 

It’s not possible to carry forward any unused ISA allowance from one tax year to the next. So, if you can, it’s best to use your full ISA allowance every year. Whether you  invest in stocks and shares, save in cash, or do a bit of both, ISAs are an easy, tax-efficient way to make the most of your money. 

With the personal tax year-end approaching on 5th April, if you haven’t done so already, now’s the time to put your ISA plan into action.  

Risk warning:

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not reliable indicators of future performance. A stocks and shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice. 

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Lisa Caplan
Lisa Caplan is head of financial advice at Nutmeg. She combines her wide experience of developing brands for blue chip companies with eight years as a chartered financial planner delivering financial advice to a range of people at different stages of their lives.

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