ISA’s 20th Birthday Part 2 – Stocks & Shares vs Cash ISA
Part 1 of our series on the 20th birthday of the ISA concluded with naming the two original ISAs, so now it’s time to decide which one takes the crown – the Cash ISA or the Stocks & Shares ISA, who would you put your money on? For millions of us, a Cash ISA is the first port of call when we’re ready to start building a savings pot for the future, and the Stocks & Shares ISA is where others begin their investing journey, and both have endured 20 years in an ever-evolving financial world.
The major weakness to choosing a Cash ISA is that your money could be losing buying power. If inflation is higher than the rate of interest you’re earning on your Cash ISA, the real value of your money will fall over time. Slowly but surely, the buying-power of your savings will be eroded, and your hard-earned money will de-value, even though it appears you have more than you started with.
A practical example would be: If you save £100, and the interest rate is 1%, your money would grow by £1, meaning you have now £101. However, with inflation at 2%, although you have £101 pounds in your bank, it only has the buying power of £99, so not only has your money not added in value, it has lost it.
A Stocks & Shares ISA has the potential to grow your money on average by 20.4% (according to data from the 2016/17 tax year on moneyfacts). Risk can act as a deterrence making Cash ISAs appear to be a safer option, but what many people still do not realise is that the biggest threat to a Cash ISA investment is inflation.
Setting financial goals is a crucial part of successful saving and investing, as they can keep you motivated and focused and allow you to track any progress and growth. For those saving up for a trip to sunnier horizons or a new set of wheels, a Cash ISA is a popular route.
However, for longer-term goals, a Stocks & Shares ISA could add a little more sparkle to your coins in terms of value The longer you leave your money alone when investing, the higher the chances of a good return, which is always something to consider when setting financial goals.
If you plan to invest for at least 5 years, a Stocks & Shares ISA could be more effective. You have to assess your attitude to risk and figure out what you feel comfortable with. Generally speaking, Stocks & Shares ISAs have better growth potential than Cash ISAs, however, to benefit from any growth, you should always aim to invest for at least 5 years, no matter how you choose to invest.
This chart presents data collected in 2017-2018 where Cash ISA subscription dropped by a massive 679,000, whilst Stocks & Shares ISAs increased by 246,000. The share of Cash ISA subscriptions as a proportion of all ISAs fell from 77% to 72% in just one year. It looks like the secret’s out, and people are realising how much more your money can do in the right ISA.
Chart soured from gov.co.uk
To conclude, a Stocks & Shares ISA offers a better chance of a higher returns over the long-term. You can choose different investments for your Stocks & Shares ISA based on where you want to invest and your attitude to risk. It all down to you and your choices.
|Stocks and Shares ISA||Cash ISA|
|Goals||Effective for long term||Effective for short term|
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.