Cash ISA vs Investment ISA: What is best suited to you?
Can't decide between Investment ISAs or Cash ISAs?
Whether you choose a Cash ISA vs an Investment ISA could be dependent on a number of factors.
How long do you want to wait before accessing your money?
If you want your money in the short term i.e. in less than 5 years, a Cash ISA won’t see any short-term losses; indeed it will not 'lose' any money over time. Bear in mind that inflation can reduce the value of your money in the future.
The gains you make will be based on the interest rate of your Cash ISA account, as well as the annual charges on the ISA levied by the provider. Keep in mind that many Cash ISA providers may charge for withdrawing your money before a certain time period. For example, some Cash ISAs have 60 or 90-day notice periods built in.
If you are willing to wait it out in the medium to long term, i.e. from 5 to 10 years and beyond, an Investment ISA uses the stock market to offer greater long-term growth potential than cash savings.
You should consider that some providers might charge exit fees for early exit from the plan. There may also be an annual management charge (AMC), platform charge or dealing charges. And you should remember that as with all investments, the value of your money can go down as well as up and you could get back less than you pay in.
What is your attitude to risk?
Cash ISAs are traditionally viewed as 'risk-free' and while it is true that the balance of your account will never decrease (providing you do not make any withdrawals), over a longer period of time, the real risk could be that the actual value of the money in your account could reduce due to inflation.
Investment ISAs can offer a broad range of risk rated funds, from With Profits funds which can offer capital guarantees at the lower end of the risk scale, to stock market funds which will rise and fall with the markets.
Generally speaking, the higher the potential risk, the higher the potential reward. Again risk is generally reduced with investments in relation to the amount of time you are willing to leave your money before withdrawing it, although you can get back less than you've paid in.
Are you investing for yourself or a child?
If investing for a child under 18 you have the option of opening a Junior ISA for them. Opening a Junior ISA for a newborn means you will have plenty of time to see your savings or investment grow, as the account does not become the property of the child until they turn 18.
Junior ISAs, like their adult counterparts, also come in Cash and Investment versions and the same considerations as above should be made.
With Scottish Friendly, you have the option of opening an adult Investment ISA in your own name, after which you could open an additional policy or ‘pot’ in a child, or grandchild’s name. As long as you remain within your annual ISA allowance, you can open as many 'pots' as you like. By using your own ISA allowance, this could give you more control over your child’s investment than a Junior ISA, which belongs to the child.
Remember - both Cash and Investment ISAs are tax-free
One of the main advantages of ISAs is they are tax-free. This is true for both Cash and Investment versions, but it works differently for each version.
Tax-free in relation to a Cash ISA means you don’t pay tax on any of the interest earned accrued on your savings.
Tax-free in the case of an Investment ISA means the fund your plan invests in grows free of income and capital gains tax - other than tax on dividends from UK shares.
You should consider in both cases that tax treatment depends on your individual circumstances and tax law may be subject to change in the future.
Be aware of the limits
It hasn’t always been the case, but Cash ISAs and Investment ISAs now share the same limits.
There are also two newer types of ISA to consider: an Innovative Finance ISA and a Lifetime ISA. The total amount you can save or invest in tax year 2018/2019 is £20,000 and you can split this between a Cash, Investment ISA or Innovative Finance ISA, or use up to £4,000 of the limit in a Lifetime ISA. The Junior ISA limit for 2018/2019 is £4,260.
Scottish Friendly doesn't provide advice. The information provided should help you decide if an ISA is suitable for you. If you're not sure whether an ISA is suitable, you should contact an independent financial adviser for advice. Advisers may charge for providing such advice and should confirm any cost beforehand.
Our Investment ISAs
Invest in the stock market tax-efficiently with our range of Investment ISAs.