If you are currently trying to decide whether you should go for a cash or investment ISA, read on. For some people the choice isn’t difficult at all, but particularly for people who are new to ISAs, deciding which the best account is for you can require a little bit of research.
The main differences
As you have probably already guessed, the main difference between these two ISA types is that one involves cash savings and the other one involves investments, usually in the form of shares.
They are both tax-free forms of savings, but they do have their other differences, too. If you choose a shares ISA then you will receive dividends based on your investment and the performance of the shares your money has been invested in. Depending on the account you choose, there will be a certain level of risk attached. This is because shares ISAs are usually linked to the stock market – which has the potential to fall as well as grow.
This is one of the reasons the shares ISA is generally thought of as an account for the medium to long term, and you should only open one if you are comfortable with the risk attached. By contrast, any money you put into a cash account will be safe. You earn interest according to the rate attached to the account, which means that ISA investment rates for cash accounts are less variable than for investment options.
However, since there is less risk involved with a cash ISA, it means that the rate of return is usually not as good as the best stocks and shares ISA.
The two account types also have different savings limits that it is important to be aware of. If you choose a shares ISA for the 2012 tax year, the investment limit is £11280. For cash ISAs, the limit is £5640. You can also make the choice to save half of the total £11280 allowance as cash and the other half as shares if you wish.
Making your choice
As mentioned above, one of the main things you will need to take into account when deciding between a cash or shares ISA is whether you want to take on the risk of an investment for a potentially very good return, or whether you’d rather stick with the cash option.
If you do go for a cash account then this has a significant advantage over regular savings accounts in that it is tax-free, which enables you to make the most of what you save. This can also be a good option for people who are interested in making investments but want to get into the habit of saving regularly before making the jump to the shares option.
If you choose the shares ISA then you need to bear in mind the variable ISA investment rates and make sure you do your research beforehand so you know what your money will be invested in and ensure that you have the best possible chance of getting a good return on your investment.