Should you choose a cash ISA or a stocks and shares ISA?

For savers, the trick is to move quickly.

Young girl, sitting on sofa, counting money from jar, elevated view

Millions of people continue to pile into cash ISAs, even though rising inflation means their returns can’t keep pace with living costs.
According to HMRC data, around 13m ISA accounts were subscribed to in the 2019/20 tax year, up from 11m in the preceding tax year. The number people signing up for cash ISAs increased by 1.2m in 2019/20, with just 300,000 people paying into stocks and shares ISAs. There is currently more than £316 billion sitting in cash ISAs, with nearly £50 billion paid in to new and existing accounts in 2019/20 alone. This represents a £4.8 billion increase on the amount paid into cash ISAs in the preceding tax year.

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Kevin Brown, savings specialist at Scottish Friendly, said: “For savers, the trick is to move quickly. Savings rates have stabilised but remain low and if inflation ticks upwards then your cash is going to steadily lose value. To limit the damage, people should shop around to find the best deal they can. Even if you can’t beat inflation it’s worth trying to minimise your losses.

“Also, it’s worth remembering that if you don’t need ready access to your cash and want to save for the long-term, then stocks and shares can offer greater growth potential.”

Stocks and shares ISAs explained
Many people pile savings into cash ISAs rather than stocks and shares ISAs because they are worried about the risks involved in investing. While there’s no escaping the fact that the value of investments could fall, potentially leaving you with less than you put in, it’s worth remembering you might end up with returns that are much higher than those provided by cash ISAs. You must however, keep some cash savings readily accessible in case of emergencies.

Heather Owen, financial expert at Quilter said: “Although it is understandable that large drops in the stock market may spook investors, it’s wise to take a longer-term view of your savings and investments. Over a longer period, compound returns in a stocks and shares ISA can deliver far better results particularly in light of the low interest rate environment we are currently in.”

This tax year you can pay up to £20,000 into a cash ISA, stocks and shares ISA, or an innovative finance ISA, which allows you to put your money into peer-to-peer lending, or you can split your allowance between two or three different types of ISA. If you’re considering investing in a stocks and shares ISA for the first time, there are plenty of online platforms such as Nutmeg, Evestor and Wealthsimple which enable you to pick from a range of ready-made portfolios. All you usually need to do is answer a few questions, and these platforms will then show you the portfolio which is most likely to suit your needs, based on your attitude to risk and your investment objectives.

Remember that you should never put your money into anything you don’t understand, so if you want to open a stocks and shares ISA and need help deciding which investments to choose, seek professional independent financial advice.

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