If you’re thinking of investing in an ISA, you have two main choices: a Cash ISA or a Stocks and Shares ISA.
Cash ISAs are traditional savings accounts and pay interest on your savings, while the returns from a Stocks and Shares ISA are variable and depend on stock market performance.
So, which could give you a better return? Keep reading for all the information you need.
Most flock to Cash ISAs
Despite interest rates being at record lows, most Brits put their savings into a Cash ISA.
In the tax year 2015/16, four in five (80%) of the 12.5 million ISA accounts subscribed to were Cash ISAs. While Stocks and Shares ISAs were initially popular on their launch, Cash ISA subscriptions have been consistently higher than Stocks and Shares ISA subscriptions since 2001.
James Rainbow, Co-head of UK Intermediary Business at Schroders UK, says: “On one level it’s understandable that so many more people would prefer savings over investment. After all, the stock market turmoil during the financial crisis is still fresh in the memory.
“But the data we have provided here adds to an existing body of evidence that shows the stock market tends to grow your money far faster than savings accounts over longer timeframes.”
Stocks and Shares ISAs generally offer better returns
Just one in five ISA savers chooses a stocks and shares product despite analysis revealing that these investments generally offer a better return than their cash equivalents.
For example, our Stocks and Shares ISA has paid a bonus of 3% in each of the last nine years. Research published in the Daily Express showed that Cash ISAs saw growth of just 1.01 per cent in the 2016/17 tax year, and so our Stocks and Shares ISA would have given you around three times that return during that tax year. However, it is important to bear in mind that past performance isn’t guaranteed.
Over the longer term, consistently choosing stocks and shares over cash ISAs since their launch in 1999 would have given you a return that is tens of thousands of pounds higher.
If you had used your full allowance each year since ISAs were launched, you would have put away a total of £101,520.
According to research , if this money had been kept in cash it would now be worth £105,518. If the same sum was put into the FTSE All Share index it would be worth £166,391 – giving returns £60,000 higher than cash.
Factors you should consider when taking out a Stocks and Shares ISA
While lots of research shows that stocks and shares offer a better long-term return than cash savings, there are some factors to consider.
The first is that the potential for better returns comes with greater risks. While your Cash ISA savings are protected up to £85,000 under the Financial Services Compensation Scheme, there is no guarantee with a Stocks and Shares ISA.
As your money is actively invested in the stock market, the value will fluctuate based on the market and so there is a chance you may end up with less than you put in. Remember that past performance is not a guide to future performance and
that your capital is at risk.
In addition, a Stocks and Shares ISA is generally better seen as a medium to long-term investment. You should really only consider this type of ISA if you are investing for at least five years, as this gives you enough time to weather the ups and downs of the stock market.