When it comes to tax-free savings, there are now several different ISA types to choose from. There’s the classic cash ISA, risky investment ISA, first-time buyers’ friend the Lifetime ISA, as well as the Innovative Finance ISA. The main distinction, however, is still between cash and investment, with the Lifetime ISA for instance offering both possibilities. But which one is better?
Statistics show that the vast majority of savers are still invested in cash (according to Government figures from 2018), but the returns that can be made on investment ISAs mean they shouldn’t be dismissed out of hand. To see which one is right for you, let's take a look at both of them in turn.
Cash ISAs are exactly what they say on the tin – they're accounts that let you save in cash, keeping things simple and giving you a great tax-free home for your money. There are different versions you can choose from depending on your circumstances, such as instant access accounts (where you can put money in and take it out as often as you wish) and fixed rate ISAs (where you'll deposit a lump sum and keep it in for a fixed length of time, with the trade-off usually being a better rate than with instant access accounts), and any interest will be entirely free from tax.
The main benefit is that because you're saving in cash there's no investment risk whatsoever. The savings rates on these accounts may not be exceptional, but you'll never get back less than you put in, and as long as you don't deposit more than £85,000 with any one institution, you'll furthermore be covered by the Financial Services Compensation Scheme (FSCS) should the bank get into financial difficulties (note that non-UK banks may have other limits on their depositor protection schemes).
An investment ISA, otherwise known as a stocks & shares ISA, is a bit different. In this instance you're not saving in cash but are instead actively investing your money in the stock market, while retaining the tax-efficient element of a traditional ISA.
Again there are different types you can choose from, this time depending on whether you want to invest in individual shares yourself or leave it to the hands of a fund manager, but the majority of these accounts will use collective investment funds to spread risk and allow you to invest across a range of different areas.
The most important thing to bear in mind is that your money isn't necessarily safe. There's a greater amount of risk quite simply because you're actively investing in the stock market – you're not getting a set interest rate, so your returns will depend entirely on the performance of the funds and there's a chance you'll be left with less than you put in.
It's more suited for those with a longer-term view of investing as well, as although you'll usually be able to access your money should you need to, it won't be as easy as with an instant access cash version. Investors can now benefit from FSCS protection up to £85,000 if their provider goes bust, the same as for deposit savings.
Having said that, there's still the potential for better returns when compared to a traditional cash ISA – especially considering cash ISAs have generally been paying lower returns than even their non-ISA cash counterparts since the personal savings allowance was introduced in 2016. Risking your savings on the stock market is a long-term gamble, so you’ll want to make sure you pick the right account and you won’t need the money for at least five years.
Ultimately, it's entirely down to you. Cash ISAs will be more suited for those who don't want to risk any of their capital whatsoever and prefer the safety of a traditional savings account, while those who are comfortable with an element of risk for the potential of better returns might like to consider an investment ISA instead.
Keep in mind that while people tend to think of investment ISAs as only being suitable for those putting aside significant amounts of money each month, in reality there's little deviation from the requirement of cash ISAs. Some investment versions can be found that will let savers pay in as little as £10 per month, so although the appetite for risk still needs to be there, the vast wealth doesn't.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.