Since 2012, the average cash ISA rate has fallen from 2.84% to just 0.82%, while stocks and shares ISAs are performing far better, delivering an average growth of 7.4% during the 2014/15 tax year.
Clearly the latter carry a varying degree of investment risk (depending on the type of funds you invest in), but does a record-low savings rate mean cash ISAs are dead?
The benefits of a cash ISA
Whatever the current rate of interest, the fact is that savings in a cash ISA are free from income tax and they don’t count towards your Personal Savings Allowance. This means you can have a cash ISA and earn up to £1,000 income from other savings (£500 if you’re a higher-rate taxpayer), before having to pay tax. Whether or not you choose to invest in the stock market, you’ll always have a need for rainy day funds in the event of an emergency and as a safe, tax-efficient haven, cash ISAs are a useful vehicle. They are easy to open, you normally won’t need to give notice to withdraw funds and anyone over 16 can save up to £15,240 in the current tax year.
Investing in the stock market
If these benefits still don’t outweigh the chance of a better return on your money, it’s worth looking at a stocks and shares ISA, where you can invest in individual company shares, unit trusts, investment funds, government bonds and corporate bonds. By choosing to invest in a stocks and shares ISA you don't pay capital gains tax (CGT) on any gains made – great if you exceed the £11,100 annual CGT allowance. However, as with any stock market investment your money is at risk, so you’ll need to think about how much risk you are prepared to take before you take the plunge.
The tax efficiency of ISAs is based on current rules. The current tax situation may not be maintained. The benefit of the tax treatment depends on individual circumstances. Although there is no fixed term, you should consider stocks and shares ISAs to be a medium to long term investment of ideally five years or more. The value of your investments and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest. You should not use past performance as a reliable indicator of future performance.
If you’re not happy about the return you’re getting on your savings, please get in touch and we’ll help you explore your options.