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Navigating the world of ISAs? Discover the pros and cons of Cash ISAs and Stocks and Shares ISAs to make an informed decision about your savings and investment goals.

Cash ISA vs Stocks and Shares ISA ‑ which one is best for me?

You want to make the most of your ISA allowance - but you’re unsure whether a Cash ISA or Stocks and Shares ISA is best for you.

Your annual ISA allowance is £20,000 each tax year, and both the main types of ISAs have tax advantages. If you save into a Cash ISA, you receive tax-free interest on your money. Or, if you invest in a Stocks and Shares ISA, any investment growth and income is tax-free.

These days, it’s harder than ever to make the choice. If you invest in a Stocks and Shares ISA, your money could potentially outpace inflation over time. However, several of the top-paying Cash ISA accounts are now beating inflation.

So how can you pick the right one? Don’t worry, we can help. We’ve broken down the basics of a Cash ISA versus a Stocks and Shares ISA so you can decide what’s best for you.

What’s the difference between a Cash ISA and a Stocks and Shares ISA?

Getting to grips with the differences between Cash ISAs and Stocks and Shares ISAs can be tricky. To help you choose between them, here’s a summary of their main differences:

What is a Cash ISA?

A Cash ISA is a type of savings account that pays tax-free interest on your money. Interest is paid regularly – monthly or annually, depending on the ISA provider you choose. Your money in a Cash ISA is safe as you can’t lose it, subject to FSCS limits of course. But interest rates on Cash ISAs are often lower than inflation, so inflation can chip away at the value of your cash savings as the amount your money can buy over the years gradually falls.

You can choose different types of Cash ISAs. For example, you might want an easy access Cash ISA with a variable rate to save for emergencies, or a fixed-rate ISA that comes with a higher rate but ties up your money for a specific time period.

What is a Stocks and Shares ISA?

A Stocks and Shares ISA is basically an investment account. When you invest in a Stocks and Shares ISA, your money is invested in the stock market. Any gains you make from investment growth or income is tax-free. But as with any investment, there’s the chance you could lose as well as gain money. The hope is that, over the long-term, your investment will rise significantly in value, and beat returns from cash accounts and inflation. Your returns aren’t limited to a certain interest rate, but they also aren’t guaranteed, so there’s some risk involved in investing.

How do I choose between a Cash ISA and a Stocks and Shares ISA?

You don’t have to choose between them, as you can open both types of ISA in the same tax year if you want. The current rules mean that it is now possible to pay into more than one of the same type of ISA. So, you could divide your £20,000 allowance between a Cash ISA and a Stocks and Shares ISA in whatever proportion you wish.

You can pay into multiple ISAs of the same type in each tax year. So, you could pay into several Cash ISAs and/or Stocks and Shares ISAs in a single tax year, for example.

But you mustn’t exceed your £20,000 annual ISA allowance, and remember it’s a ‘use it or lose it’ allowance – so, you can’t roll it over to the next tax year. The Tax Year ends on 5th April.

When you’re choosing which type of ISA to save into, start by thinking about your savings goals, and how you feel about risk. A Cash ISA may be suitable if you’re saving over the short-term (five years or less) and don’t want to risk losing your money. Experts recommend having at least three months’ worth of living costs in an easily accessible cash account for emergencies, such as a boiler breakdown. If you have more available to save, you could think about investing for the long term for the chance of higher returns.

Money in a Stocks and Shares ISA could go towards longer-term goals, such as retirement planning, or children’s university fees, with enough time to ride out the highs and lows of the stock market over five years or longer. It’s important to think about your personal circumstances, though, and if you can afford to potentially lose money. If you think you may need your savings within the next few years, then it’s generally wise to stick to cash.

Can I transfer between my Cash ISA and Stocks and Shares ISA?

You can transfer money between different types of ISAs, and moving your money won’t count towards your ISA allowance, provided you switch the money directly from one ISA to another. So, you can move money from your Cash ISA to your Stocks and Shares ISA as well as investing up to your £20,000 allowance. Similarly, you can move money from a Stocks and Shares ISA into a Cash ISA. But in this case, you’ll need to sell your investments first so they’re in cash before making the transfer.

You may want to make the switch if, say, you don’t want the risk of being invested in the stock market anymore, or to lock in the gains you’ve made. Or, if you’re willing to take more risk, you may want to move your money from your Cash ISA into a Stocks and Shares ISA.

What do I do next?

Hopefully we’ve made it easier for you to choose the right ISA for you. Generally speaking, if you have shorter term savings goals, a Cash ISA could be better for you. If you’re looking to invest for longer, you may be more suited to a Stocks and Shares ISA, as long as you’re happy with the risk of losing some of your investment for the chance of higher returns overall. Or, take a mix and match approach and pay some into each.

Feel ready to choose an ISA? Check out our range of Cash ISAs and our Stocks and Shares ISA. Or take a look at some of our helpful guides, to learn more about investing in a Stocks and Shares ISA.

We hope the information in this article is useful, but it isn't financial, personal or tax advice. If you want expert advice, you should speak to an Independent Financial Advisor. Remember, the value of investments can go up and down, so you may get back less money than you put in.

You should think of investing as a medium to long-term commitment – so be prepared to invest your money for at least five years. Tax depends on your individual circumstances and the regulations may change in the future.

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