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Cash vs Investment ISA

What is the difference?

When it comes to saving or investing your money in an ISA, we know it can be a hard decision. There’s more than one type of ISA available – Cash ISA, Lifetime ISA, Innovative Finance ISA and Stocks & Shares ISA. But with Cash ISAs and Investment ISAs (also known as Stocks and Shares ISAs) being the most popular, we've listed their main features to help you understand the difference between them.

Cash ISAs

An account that allows you to put money aside tax-free, this usually comes with a fixed interest rate at which your money will grow. This means that the taxman can’t touch any interest you earn on your savings.

Cash ISAs are generally considered secure, as you will always get back at least what you have paid in, and your money is usually easy to access, too. If you want your money in the near future (less than 5 years), you might consider this a good option. But don’t forget that inflation could reduce the value of the money you get back so it could be worth less than you have paid in, particularly given current low interest rates.

Investment ISAs

As Investment ISAs access the stock market, they offer greater long-term growth potential for your money than cash saving, if you are happy to accept an element of risk.  If you are planning for the longer term future and willing to wait at least 5 years to 10 or more before accessing your money an Investment ISA could be well suited to you. As an investment, it’s value can go down as well as up, so you should remember you could get back less than you paid in.

When you save or invest in a Cash ISA, the taxman cannot touch the interest you earn. Similarly, any gains made on investments in an Investment ISA are also free from tax. This includes income tax and capital gains tax (except for tax already paid on dividends from UK shares).

Remember, tax treatment depends on your individual circumstances and tax law may change in the future.

Both types of ISA are tax free, so no matter which you choose, your money is sheltered from the taxman.

Plus, it doesn’t have to be ‘either or’. Every year you have an overall annual ISA allowance that you can use in whichever way suits your goals best. This could be saving or investing in one type of ISA, or splitting your ISA allowance across one of the many types, for example a Cash ISA and an Investment ISA.

Depending on how long you want to wait before accessing your money, and your attitude to risk, it’s possible that choosing just one type of ISA might suit you better. The handy checklist below compares some of the differences between a Cash ISA and Investment ISA.

Cash ISAs

  • Could be right for you if you are saving for the short term
  • Many Cash ISAs allow easy access to your money, some require notice and some fixed rate accounts may penalise you for withdrawing savings early
  • You will always get back at least what you have paid in
  • Low rates of interest could mean that the return on your money could struggle to outpace inflation

Investment ISAs

  • Could be right for you if you are looking for medium to long term investing (min of 5 years to 10 or more)
  • Investment ISAs offer greater potential for your money to grow
  • Some products and providers may charge for withdrawals and exit fees may apply
  • As with all investments, your capital is at risk and you could get back less than you pay in

Our Investment ISAs

At Scottish Friendly, we offer Investment ISAs. We have a selection of four Investment ISAs to choose from, with easy start options and products with a range of funds available, investments start from just £10 a month or more.

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