Cash ISA vs stocks and shares ISA

A cash ISA earns interest on savings, while a stocks and shares ISA aims to provide returns by investing in stock markets. We look at the facts about these two ways to work towards your financial goals. Remember, when you invest your capital is at risk. 

What are cash ISAs and stocks and shares ISAs?

An ISA, or Individual Savings Account, is a government-backed, tax-efficient saving plan. 

There are several types of ISA, but the two most popular are cash ISAs and stocks and shares ISAs. 

• A cash ISA is similar to a savings account, where your money earns a rate of interest as decided by the account provider. You pay no income tax or capital gains tax on your cash ISA account, whereas with a bank or building society account you may have to pay tax if you earn over £1,000 in interest each year, depending on which tax band you are in.
• A stocks and shares ISA is a tax-efficient investment account, where your money is invested in and aims to make returns on the stock markets. You’ll pay no income tax if you sell an investment that grows in value, or on dividends (profits distributed to shareholders). In a general investment account (GIA), you may need to pay tax on any capital gains or dividends if you exceed certain tax-free thresholds. 

We’ll look in more detail at these two types of ISA, to help you make an informed decision about which options are right for you. 

How does a cash ISA work? 

A cash ISA works like a standard savings account. Your money is held as cash and earns interest, but you don’t pay tax on it.

Cash ISAs come in different formats, but the two main types are as follows: 

• An easy access account lets you take money out without a penalty. However, interest rates are usually variable, so they have the potential to change.
• A fixed rate account that locks your money away for a set period to earn or keep higher interest rates. This rate will often be higher than easy access options. However, there are sometimes restrictions on when you can withdraw.

Pros of a cash ISA 

There are various benefits of a cash ISA, some of which include: 

• Save without paying any income or capital gains tax on interest earned. 
• Your money is generally safe, and you won’t lose your initial investment.
• You can get hold of your funds quickly, unless you choose a fixed term account.
• Available to anyone from age 16 to start saving.

Cons of a cash ISA

Whilst cash ISAs can be a simple and easy way to save, there are some downsides you should be aware of.

• Interest rates can change. Some providers might offer introductory interest offers that fall in time.
• The interest you get might not keep up with inflation.
• Fixed term cash ISAs offer higher interest rates but if you are likely to be charged a penalty fee for withdrawals outside of the terms.

How does a stocks and shares ISA work? 

Any money you put into a stocks and shares ISA is invested, and what you get back depends on the performance. These investments might be individual stocks and shares, bonds (a loan to a company or a government) or a fund (a collection of stocks, shares and other assets collected into one investment). 

Stocks and shares ISAs are exposed to the stock market, which means there’s no guarantee your money will grow.

Pros of a stocks and shares ISA 

The benefits of a stocks and shares ISA include the following: 

• Historically, stocks and shares ISAs have generated higher returns than cash ISAs. Although this isn’t guaranteed.
• You can invest without paying any tax on profits (the dividends, and/or capital gains). 
• A stocks and shares ISA will aim to provide greater returns than a cash ISA.
• Over long periods, compounding (earnings generated from previous years) may produce significant growth. 
• Over time, a stocks and shares ISA has a greater potential to meet or beat inflation than a cash ISA. 

Cons of a stocks and shares ISA

Stocks and shares ISAs are a great way to grow your money, but there are a few drawbacks you should be aware of.

• When you put funds into a stocks and shares ISA it’s usually invested in funds, so performance can fluctuate. You might get back less than you originally invested.
• The recommended minimum term is 5+ years, so a stocks and shares ISA might not be the best option if you need access to your money sooner.

Cash ISA vs stocks and shares ISA: compare your options

Not sure which ISA to choose? We’ve put together a comparison table highlighting the main differences between cash and stocks and shares ISAs.

	Cash ISA	Stocks and Shares ISA
What is it?	Tax efficient savings account	Tax-efficient investment account where your money is invested in companies, gilts and bonds
Returns	You get paid interest on your savings	You make money if the value of your investments go up
Potential risk	Low – you won’t lose your initial savings	Some, as the value of your investments can go down and you might get back less than you put in
Potential rewards	Low, but safe	Higher, depending on your investment choices
Contribution limit (total across all ISAs you own)	£20,000	£20,000
Minimum age	16 years old	18 years old
Capital gains or income tax	No	No
Fees	Usually no or very low fees	You will probably pay fees to manage the account
Transferrable	Yes	Yes
Instant access	Usually yes but withdrawal fees may apply on fixed term accounts	It typically takes 5-7 working days to access your funds
Works best for	Short-term savings such as a car or holiday	Long-term goals like saving for retirement or growing wealth

Can I have a cash ISA and a stocks and shares ISA? 

Yes, you can have a cash ISA and a stocks and shares ISA open at the same time across different providers. This gives you flexibility in how you save and invest to grow your money more over the long term.

Here’s how it works:

Your annual ISA allowance for the 2024/5 tax year is £20,000.

You can split this allowance between different ISAs, as long the combined value of your savings and investments in that tax year do not exceed the overall annual allowance. For example, you could put £5,000 in a cash ISA and £15,000 in a stocks and shares ISA, or any other combination that adds up to £20,000 or less.

Important note if you have a Lifetime ISA: You can only pay into one Lifetime ISA in a single tax year. The maximum you can contribute is £4,000, which counts towards your annual ISA allowance.

Should I invest in a cash ISA or a stocks and shares ISA? 

As a cash ISA often provides instant access to money and is low risk, growth is unlikely to be spectacular. This means it might be a good option for rainy-day savings, or for funding short-term projects. 

A stocks and shares ISA on the other hand has the potential to provide greater returns. However, because markets can move up and down, you’ll want to keep it for at least five years.

This means that if you put money into your stocks and shares ISA before a time of poor performance, it will have more time to recover. For this reason, it can be a good option for long-term investing. 

When deciding which is the right option for you, there are a few key factors to consider: 

1. Your financial goal. 
2. How long you will need to save or invest for. 
3. Your attitude to risk. 
4. Your personal circumstances. 

Considering these factors can help you decide which is the best option for you.  

For example, if you have short-term savings goals, you want to be able to access your money quickly and you are not comfortable with risk, then you might want to opt for a cash ISA.  

However, if you are financially secure, you don’t need to access your money in the next five years and you are comfortable with risk, then you might be more inclined to invest into a stocks and shares ISA.  

Additionally, if you have expensive debts, then it’s often a good idea to pay these off before you start investing. 

Of course, choosing cash ISAs and stocks and shares ISAs isn’t an either/or equation – you can pick or choose to reflect your needs. For instance, you could invest in just a cash ISA or just a stocks and shares ISA. Or you could invest in both types, allocating a proportion of funds to each that reflects your financial goals and your attitude to risk. 

In summary

Both types of ISA accounts can be a great way to save for the near or distant future. Here’s a quick summary of which ISA account might suit your finances.

Cash ISAs can be a good choice for people with shorter-term savings goals, or those not comfortable with taking on investment risk. For example, if you’re looking to buy a new car in a couple of years, or you’re planning on retiring and need your savings soon, then a cash ISA might be a better option for you.

Stocks and shares ISAs suit people with longer-term goals who are more comfortable with taking on some risk. For example, if you’re looking to build up your wealth over the long-term or plan for your retirement, a stocks and shares ISA might be worth considering.

Ready to start investing towards your future? 

Thanks to our investment strategy, which uses a tactic called ‘smoothing’, over the past 10 years Shepherds Friendly members with a Stocks and Shares ISA have enjoyed steady returns on their investments.

You can open yours now in a few simple steps. 

Be sure to read through our Important Information Guides for all the key information about our Stocks and Shares ISA. Remember that when you invest, your capital is at risk.