You may be looking at saving your money into an ISA. But are you considering which one is best suited to your needs?
The ISA market has expanded in recent years to include further varieties including
But the core two versions remain the Stocks and Shared ISA and the Cash ISA.
If you are confused as to which one to select, there are some simple rules you should be aware of.
A Cash ISA is similar to a traditional bank account which earns you money through interest on your savings.
Many see cash savings as a very safe option. It’s true that the value of your savings cannot fall, but the interest rates on offer for these products at the moment date extremely low.
However, a cash ISA can still have its place.
If you are saving for a short term savings goal which means less than five years, then a cash ISA could be a place to save your money whilst also sheltering it from the taxman.
And whilst the returns are unlikely to be large, you can be guaranteed that due to the nature of this product, the value of your ISA fund will not fall. You will also benefit from compound interest if you keep your money in a cash ISA.
Stocks and Shares ISA
A Stocks and Shares ISA in contrast to a Cash ISA is best suited to medium to long term plans.
Medium to long term in this context means a minimum of five years investment, ideally ten.
Why so long?
The nature of investing means that on a day to day basis, the value of your fund is likely to go up and down. Take a look at the FTSE performance for a week and you will see this pattern.
However, look at the FTSE performance over a period of five or ten years and you will see that the general trend is upwards.
If you were to put all your cash into any investment and take it out in A weeks time, there’s a chance that you could lose money.
However, over the long term, dependent on your investment choices of course, you would hope that like the FTSE, the general trend would be upwards this giving you more growth potential than cash savings in these times of very low-interest rates.
If you leave your money in, compound growth will also be an advantageous factor.
I am not advising you on what to do, just explaining the differences between these two types of ISA.
As with both Cash and Stocks and Shares ISAs the returns you receive are tax-free which makes them such an attractive option for many.