ISAs Explained
Which
is better – cash or stocks and shares?
Whether you opt for a stocks and shares, cash ISA or both will depend on largely
on your investment objectives and time horizon.
Over the long term, equities tend to outperform cash and bonds, but they also tend
to be more volatile so if you are investing for less than five years, or are a cautious
investor, financial advisers often recommend that you stick with cash as its value
cannot fall (although you do need to ensure that the interest rate is higher than
inflation).
It is worth remembering that you do not have to invest your entire ISA allowance
in one account or fund. You can split it so that some is in cash and the rest is
in a stocks and shares ISA. You can also hold a number of different funds or companies’
shares within the single stocks and shares element, and the funds do not have to
be from the same provider.
Over the long term, equities tend to outperform cash and bonds, but they also tend
to be more volatile
Say you wanted to invest £3,600 in a stocks and shares ISA and £3,600 in a cash
account, you might choose to split the shares element between a Fidelity fund, a
fund from Invesco Perpetual and another fund from Gartmore. However, the cash element
would all have to be in the same cash ISA account.
Are
all cash ISAs the same?
As with standard savings account, there are a number of different types of cash
ISA - easy access, fixed rate and notice accounts – and rates vary significantly
so it is well worth shopping around and not just opening a cash ISA with your current
account provider.
Historically, notice and fixed rate accounts have tended to pay higher rates of
interest than easy access deals, but that is not necessarily always the case. You
can compare the latest ISA rates
here.
As with standard savings accounts, there are a number of different types of cash
ISA
As with standard savings deals, there are catches that you need to watch out for.
Some accounts include introductory bonuses, so the interest rate drops after a while
– there is no need to avoid such accounts, but you need to make a note to move your
money elsewhere once the bonus period ends otherwise you could be left earning an
uncompetitive rate of interest. However, there is one fundamental difference between
ISAs and standard savings accounts: tax is not levied on the interest you receive
from a cash ISA. Normally, higher-rate taxpayers pay 40% on any savings interest,
while those in the basic-rate band pay tax at 20%.
Continue to Page 3 to ISA transfers >>
