Deciding between a stocks and shares ISA and a cash ISA might sound simple. However, it could prove a tricky task, especially if you’re not familiar with the intricacies of these financial instruments.
If you are unsure of the types of ISAs there are and how they work, make sure you visit our article on ISA basics. Otherwise, let’s look at when and why a stocks and shares ISA or a cash ISA could best serve your needs.
[top_pitch]
What are you saving for?
Knowing what you are saving for will make your life a lot easier when deciding between a stocks and shares ISA and a cash ISA.
For example, if you’ve landed yourself a side hustle that is earning you some extra cash and you want to make the most of it, then a stocks and shares ISA could be a great option for you, especially if you want to get some exposure to investing. However, if you have a specific goal and a particular timeframe, a cash ISA could serve you better in this instance. This is because it will provide you with a sense of security, without exposing you to the pitfalls of investing.
With that in mind, here are some financial goals and the ISA that could best help you achieve them.
1. Buying a house
This is a pretty important milestone for most people. So you will want to make sure that you have a form of security, which is usually provided by a cash ISA. If you are buying your first home and the property is valued at or under £450,000 an even better option could be a cash lifetime ISA. This will allow you to benefit from a 25% government bonus each year. Just bear in mind that because you can only deposit up to £4,000 a year, this will only work if you are planning to save over a period of time.
2. Retirement savings
This is a lifelong financial goal, so a stocks and shares ISA could help you make the most of it. When you have time on your side, exposure to the stock market could prove to be the best option for greater returns. This is because you can afford to stay invested in order to ride out any market volatility. However, if market conditions are against you, there is no reason why you cannot switch back to a cash ISA. But historically, people who take a long-term investing approach are the ones who come out on top.
If you wish, you can even use a lifetime ISA to fund your retirement. And if you want to get the best of both worlds, you can go for a stocks and shares lifetime ISA.
[middle_pitch]
3. Saving for a big holiday
This short-term goal is a no brainer, as you can put money aside in a cash ISA whenever you can afford to. Here you can also experiment with different budgeting apps, where you can split your savings into dedicated pots. You can even use the round-up functionality if it is on offer. This will allow you to round up your purchases to the nearest pound and put away the difference. If you’re struggling to put money away, this could be a great, hassle-free way to save regularly and benefit from the miracle of the compounding interest.
4. Trying out investing
A stocks and shares ISA is a great option if you want to get exposure to investing. An added benefit is that the tax wrapper will also save you time to having to deal with all the tax rules. It’s also worth exploring this option if you want to make a better return than you would get with cash ISA. If you decide to go with a stocks and shares ISA, then make sure you don’t exceed your £20,000 ISA allowance.
If you have made up your mind, it’s a great idea to explore the market before the end of the financial year on 5 April. That way you can take advantage of this year’s ISA allowance. Head over to our dedicated comparison pages to find out more about our:
Top-rated stocks and shares ISAs
Top-rated cash ISAs
Please note that tax treatment will depend on your individual circumstances and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. You are responsible for carrying out your own due diligence and for obtaining professional advice before making any investment decisions.
The post Stocks and shares ISA vs cash ISA: which is right for your goal? appeared first on The Motley Fool UK.
Is this little-known company the next ‘Monster’ IPO?
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Click here to see how you can get a copy of this report for yourself today
More reading
How has Covid-19 affected the markets and our personal finances?
How I’d invest £20k in the FTSE 100 today
A FTSE 100 dividend share I’d buy yielding 10%
Can the Cineworld share price hit 70p?
How I’d invest £100k to earn a passive income for life
