Cash ISA vs Stocks and shares ISA | Sunday 15 Sep 2024 (2024)

Anyone with some money in savings will want to weigh up which type of individual savings account to put this in: a Cash ISA vs a Stocks and shares ISA (also known as an investment ISA). Lots of people default to a Cash ISA, especially when interest rates are high, but it’s important to properly explore your options and make a conscious decision about which account works best for your needs.

In this article, we’ll compare the differences between a Cash ISA and an investment ISA, including tax, returns and interest rates, to help you decide which is right for you. Please note that AJ Bell only offers a Stocks and shares ISA and not a Cash ISA.

What are the differences between a Cash ISA and a Stocks and shares ISA?

Short-term vs long-term account

It can be a good idea to keep money that you’ll need in the short term, or that you need immediate access to, in an easy-access Cash ISA. The general rule is that any money you’re likely to need in the next five years should be kept in cash. But if you won’t need to get your hands on it for longer than that, you could look at investing it into a Stocks and shares ISA.

All investors should have a cash pot that they can take out immediately to use as a buffer in case of emergency, for example a bout of ill health or losing your job. The rule of thumb for the amount of cash you’ll need to set aside is between three- and six-months’ expenditure – to cover all essential outgoings. You’ll want that money in an easily accessible cash account like a Cash ISA, so you can get your hands on it straightaway.

Investment options

With a Cash ISA, you can only hold cash in it, which’ll likely give you a reliable interest return, but no potential for dividends or profits from investments. On the other hand, a Stocks and shares ISA is where you’d buy various investments that could grow your money by a greater amount over time and/or pay you an income in the form of dividends.

Stocks and shares ISAs let you invest in a range of different assets, including shares, funds, investment trusts, ETFs and bonds, among others. Investing gives you the best chance of beating inflation over the long term, meaning that you’ll grow your money in real terms.

Taxation

Both a Cash ISA and a Stocks and share ISA have tax perks, which means you won’t pay any tax on the interest or the investment growth of your money. So, whichever you choose, you’ll get to keep all the returns you make – whether that’s interest on your cash, or dividends and profits on your investments – handing nothing over to the taxman.

Returns

Any money you’re putting away for the long-term could be better off invested in a Stocks and shares ISA, as it could grow by more than if you keep it in cash. But you’ll need to be prepared to take more risk with the money you put into this type of investment ISA, as it’s possible to lose money as well as make it. You can vary how much risk you take, depending on what you invest in, and this can also have an impact on your returns.

The average rate of return for a Stocks and shares ISA over the past decade is 9.6%, according to Moneyfacts, whereas the average rate of return for a Cash ISA is 1.2%. Higher potential returns coupled with the magic of compounding means that, over longer periods, any money you’ve invested via a Stocks and shares ISA can be supercharged – you could end up with a much bigger pot than the one you started off with.

The downside is that returns aren’t guaranteed and if your investments fall in value, you’ll end up with less money than the amount you paid in. It means that you’re taking more risk with your money, but the longer you invest, the more likely you are to see positive returns.

Interest rates

One of the benefits of a Cash ISA is that you’ll get a reliable return – you’re guaranteed to get the interest rate you’ve been promised by your bank or building society. If you opt for a variable rate account, you might see that rate drop over time, but you’ll never lose money or get back less than you put in. So, although Cash ISA returns tend to be a lot lower, when interest rates are high, a Cash account may be a more favourable and less risky option for many.

The downside is that Cash ISAs rarely pay more than the current rate of inflation. That means that while your savings pot is growing, it’s unlikely to keep up with rising prices. So, the spending power of your money is being eroded over time.

If you opt for a Cash ISA, make sure you shop around to check out different interest rates and get the best deal possible. You can check out various comparison sites to make sure your money is in the most reputable account offering the highest interest rate.

Which ISA is right for you?

Can I hold cash in a Stocks and shares ISA?

You can hold cash in your Stocks and shares ISA, and it can make sense to have a small amount of cash in there to cover any fees or charges while you wait to buy investments. But it’s not a great idea to stockpile cash in your investment ISA for a long period of time.

The reason it’s unwise to do this is because you’ll usually get a lower interest rate on your cash in a Stocks and shares ISA than you would in a market-leading cash savings account, meaning you’re not maximising your returns. It does vary between providers though, so it’s worth checking this when doing your research. Alternatively, see how you could benefit from interest rates in a Stocks and shares ISA.

Browse our cash savings accounts

Can I have a Cash ISA and a Stocks and shares ISA open at the same time?

Yes, you can hold both a Cash ISA and a Stocks and shares ISA at the same time and pay into both in the same tax year.

You can open as many Cash or Stocks and shares ISAs as you want in each tax year (though you can only open one Lifetime ISA per tax year). You’ll just need to make sure you don’t pay in more than your overall £20,000 annual ISA limit each tax year, across all your individual savings accounts.

Important information: ISA rules apply. Remember that the value of investments can change, and you could lose money as well as make it. We don't offer advice, so it's important you understand the risks. If you're not sure, please speak to a financial adviser.