As the cost of living rises and financial pressures grow, you might be looking for an effective savings solution. The good news is, ISA accounts offer a tax-free or tax-efficient home for your savings or investments, but before you start Googling the array of ISA products on the market, it’s essential to decide whether you should go for a cash ISA or a stocks and shares ISA.
Your decision will largely be based on your preferences and situation, but to help you make up your mind, we take a further look at the two options:
Just like a traditional bank savings account a cash ISA allows you to put money aside for a rainy day – the only difference is, you won’t have to pay any tax on the interest earned. Those who use a standard instant access account, for instance, have to give 20 per cent of any interest earned above a certain level straight to the Government. This shoots up to 40 per cent for higher rate tax payers and 45 per cent for additional rate tax payers which, of course, makes it more difficult to accumulate as much money as you might like.
Cash ISAs are ideal for anyone looking to make their money go further and as they’re relatively risk-free can be opened with peace of mind. You don’t have to pay to open a cash ISA either and with a variety of cash ISAs available you can find something to meet your needs by simply doing your research and getting to know the market.
The downside to this type of savings account, however, is that it tends to offer lower returns. Average savings rates were below inflation for much of 2013 and 2014, so it’s important to stay on top of the game and check all the figures before making a decision.
Stocks and shares ISA
As well as cash ISAs, you can also opt for a stocks and shares ISA which allow you to put money into a range of investments such as unit trusts, government bonds, shares in individual companies and such like. This type of ISA also offers many tax benefits as you pay no capital gains tax on returns from your investments and there’s a 10 per cent tax cap on any share dividends you might receive.
While investment ISAs tend to be somewhat riskier than cash ISAs, you can also enjoy great returns. Basically, the value of your money can go up as well as down, so as long as you’re prepared for frequent fluctuation this could be the right option for you – after all, watching the markets and deciding where to invest is all part of the fun for some people.
And if you’re new to the world of stocks and shares? Well fear not as investment management services such as Nutmeg are on hand to do all the hard work for you. This means you don’t have to be an expert in finance but can still make confident investments and get the most from your money.
Opening a cash ISA and a stocks and shares ISA
Can’t decide between the two? Well, the good news is you can open both. While there’s a limit to how much you can save tax free (£15,000 in 2014/2015, £15,240 from 6 April 2015) recent rule changes mean you can now decide exactly how you want to split this money. So, whether you decide to divide it between a cash ISA or a stocks and shares ISA or use the whole amount for one or the other is completely up to you.
This mix and match approach allows for maximum flexibility meaning that if you wanted to invest £1,500 into a cash ISA and £13,500 into a stocks and shares ISA you could do so happily.
It’s never too late to get your finances in order and if saving is one thing you want to take seriously from now on, choosing a cash ISA, stocks and shares ISA or both could be the right option for you.
The editorial unit
Photo: Efloor Trade