Cash ISAS or Investment ISAS: which is best for you?
Cash ISAS can still make prove worthwhile despite the very poor rates on offer, but Investment ISAS could likely outperform them over time.
It’s always the biggest dilemma when it comes to investing your annual Individual Savings Account allowance of a maximum of £20,000 for this current tax year. Should you opt for a Cash ISA or a Stocks & Shares ISA?
The key issue is that they are both very
different products.
They might come under the same broad ISA umbrella, but they are certainly not the same type of investment.
Pros and cons of a Cash ISA
They are very straightforward. You invest your money and the provider, often a bank or building society, will tell you how much interest you will receive.
Every bit of interest you earn will be totally tax-free and you’ll be able to get your hands on your money whenever it’s needed.
And if your provider hits a problem and goes bust, you will be protected up to £85,000 under the Financial Services Compensation Scheme.
However, the obvious downside with Cash ISAS is that the interest rates aren’t great and are very unlikely to keep pace with inflation, so your savings could lose value.
Pros and cons of an Investment ISA
You have the potential to earn substantially more than you would in a Cash ISA. However, returns are not guaranteed so you need to understand the risk involved and get financial advice on the correct funds available to suit your unique circumstances and attitude to risk.
The downside is you need to do plenty of homework to decide on what exposure you are after and which provider is offering the best arrangement. For example, the costs levied will vary enormously and your overall portfolio will need to be making returns comfortably in excess of the charges for you to enjoy a profit.
This is where Brian Mole IFA can help you
find the best place for your money.
In terms of FSCS protection, you’ll be covered for the full £85,000 per person just like you would with a Cash ISA (provided the firm didn’t go bust before March 2019).
Which one is best?
We at Brian Mole IFA feel it is impossible to say as both have their attractions. It depends on so many factors:
Age, financial position, attitude to
investment risk are important factors. You can have different ISA or savings for different purposes. If you have future expense coming up, such as building an extension to your house or paying for a holiday, then a Cash ISA makes more sense,
Although the interest you will earn is minimal,
the chances of losing it are almost zero. However, if the cash you hold in savings doesn’t grow at a rate at least equal to inflation then the real value of those savings is eroded as the cost of living increases. At present the figures don’t look especially appealing on the Cash ISA front. The best rate is currently 1.35% on a five-year account, while annual CPI (Consumer Price Index) is currently 2.5%, but inflation will obviously fluctuate over time.
Stocks and Shares ISAS can generally offer inflation-busting returns, although these are not guaranteed.
If you are saving for retirement and are
30 or 40 years old, you have got at least 20 years. Over that timescale, the returns from the stock market will outweigh the risks of losing money in the short term.
You can also reduce your risk through the way in which you invest in a Stocks & Shares ISA. There potential benefits of investing monthly premiums to negate the risks of market timing in a process known as pound cost averaging. If the stock market falls you will simply buy at a lower price the following month, reducing your average purchasing costs. For those making regular investments, short-term falls can be very good news, if you are patient, and the investments recover.
Other factors to consider
We have found that investors tend to focus on how much risk they feel comfortable taking, but more important is the amount of risk an investor needs to take to achieve their financial goals and how much risk they are able to take, which is their capacity for risk.
Therefore, the choice between a Cash ISA and Stocks & Shares ISA should be taken in the context of overall financial planning. It is about choosing the right vehicle that takes you a step closer towards achieving your goals in life. Which one is right for you will depend on your individual circumstances, whether you need the money over the short term and the capacity for risk? Cautious investors need to choose whether
to accept the real terms erosion of capital within a Cash ISA or risk losing capital due to market volatility within a Stocks and Shares ISA. However, there are cautious Investment ISAS available, that invest in a whole mix of asset classes to reduce volatility and market risk.
At Brian Mole IFA we understand fully that it really isn’t an easy decision to make. Of course, just because a Cash ISA suits your needs right now doesn’t mean it will always be a better option than a Stocks & Shares ISA, and vice versa.
It is really important not to make investment decisions based on short-term sentiment or hype. Many have done so in the past and lived to regret it. Make the best decision for you today, and revisit regularly to ensure that your current choice of investments still meets your needs.
At Brian Mole IFA we can explain in detail the vast choices of Investment (Stocks and Shares) ISAS available, to suit your exact attitude to risk and purposes. If you are unsure about the options available, feel free to make an appointment with one of our experienced Independent Financial Advisers, or simple pick up the phone for a chat.