Unsure whether a cash or a stocks and shares Isa is the right option for your money? Vicky Shaw seeks some expert tips.
With savings rates currently painfully low, and markets having been volatile due to the coronavirus pandemic, many savers may be wondering whether it’s worth putting money away at all.
But, right now in particular, a rainy day savings pot could be a vital lifeline for households, helping to tide them over during tough times. Isas are a tax-efficient way to save, as money held in them is ring-fenced from the taxman for as long as it remains held in an Isa.
In the 2020/21 tax year, which runs from runs from April 6, 2020 to April 5, 2021, the maximum you can save into Isas is £20,000. You can also split your allowance across different types of Isas.
Unsure about what type of isa is right for you? Here, Laura Laidlaw, head of customer communications at Standard Life, answers to some key questions…
1. Are you saving for the short-term or long-term?
The key difference between a cash Isa and a stocks and shares Isa is that with the latter, you are actively investing your money in the stock market. If you’re working towards a short-term goal, such as buying a new car, or looking to build up an emergency pot of savings, you could be better saving in cash.
Investments can be susceptible to market volatility, which is why they are recommended for longer term savings. If you invest money for the short-term, you could risk making a loss if you need your money and the stock market has dipped in that period. But, if you’re saving or investing for the long-term, typically a minimum of five years, then stocks and shares may well generate better returns.
2. Do you need easy access to the funds?
Some cash Isas will give you instant access to your savings, while others require that you keep the money there for a fixed amount of time, usually in return for a higher rate of interest.
Easy access accounts can be useful if you’re looking to simply put your money out of sight and out of mind. You’re less likely to unnecessarily spend the money if it’s removed from your current account, but will still accessible if you do need it.
Stocks and shares Isas can be harder to access at short notice. You can take money out when you need to, but if you do so when markets are down, then you may risk making a loss. But if you already have some emergency funds to hand, then locking some of your money away may be the best decision in the long-run.
3. What returns are you looking to secure?
The amount of money in a cash Isa will increase in line with the interest rate payable. While the rate may be variable, current interest rates are so low that the rate is unlikely to change dramatically.
If inflation – which measures the rise in the cost of living – is higher than the rate of interest you’re earning on your cash Isa, then remember that this will eat away at the real value of your money over time. Slowly, the buying-power of your savings will be eroded.
That’s why leaving your money invested in cash may not be the best option for reaching longer-term financial goals. Investing in a stocks and shares Isa could make your money work harder and could potentially generate greater returns. But there is no promise on the rate of return. In general, the longer you leave your money invested, the better your chances are of seeing it grow.
4. What is your appetite to risk?
Stocks and shares Isas offer savers a greater potential for growth, though they come with more risk. Ask yourself: ‘How much risk am I willing and able to accept?’
Investors need to remember the value of investments can always go down as well as up – so you may end up with less than you paid in.
5. Could you consider a mix of both?
If you are nervous about stock market volatility, you could hold both a cash Isa and a stocks and shares Isa. That way, you’ll prepare for both the near and distant future. For people approaching retirement, for example, having some accessible cash savings during the pandemic, rather than dipping into their pension and locking in losses, will allow their pension pot time to recover.
Remember that saving and investing in your future gives you choices – and the current economy underlines the benefits of having a mix of saving products.
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