In the savings world a lot of emphasis tends to be placed on cash ISAs, but what about their lesser-known counterpart?
Stocks and shares ISAs, otherwise known as equity ISAs, could be a viable alternative. These accounts retain the tax-free element of ISAs but invest your money in the stock market rather than a simple savings account, and have the potential to generate decent returns – albeit on the loss of some security.
By way of comparison, we've done a few calculations.
Let's say, in January 2009, you invested your full ISA allowance (which was £3,600 in the year 2008/2009) in a cash ISA, which at the time offered an average interest rate of 5.2%. If you compounded your interest and left your money untouched for five years, by now you'd have a total of £4,665.05 – meaning you'd have earned £1,065.05 in interest, posting a return of 29.5%.
Conversely, if you'd have invested the same amount of money in an average stocks and shares ISA, by now you'd have a total of £6,388 – a particularly impressive increase of 77.44%.
From these figures it might seem like stocks and shares ISAs are the way to go, especially given the record-low savings rates that can currently be found with cash ISAs. But, while stocks and shares could well appeal to those seeking a meaningful return, it's wise to exercise a bit of caution.
It's important to bear in mind that stocks and shares ISAs are a lot riskier than their cash-based counterparts. There's no guarantee of returns, and despite impressive performance over the last five years it doesn't necessarily mean that the next five years will follow suit.
The amount you get, and even the amount of capital you keep, will be subject to market fluctuations, with your money typically being invested across several funds.
However, if you're happy with the level of risk and will be able to sleep at night without worrying, our calculations show that stocks and shares ISAs could prove to be a viable alternative to the traditional savings account – just make sure to get suitable advice first.
Looking for a tax-efficient investment opportunity for your 2013/14 ISA Allowance? Compare Stocks and Shares ISAs
For more information on investments - Speak to an investment specialist at our partner TQ Invest
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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