To reflect the new tax year, this article has been updated
At a glance
- Even though the Bank of England interest rate(5.25%)1 is now running just ahead of the inflation rate (4.2% at time of publication)2, you should still keep a watchful eye on both over the next 12 months.
- Investing in a mix of Cash and Stocks and Shares ISAs may give your money the best chance for greater growth.
- We can help you rebalance your cash savings against stocks and shares investments at any point in the tax year.
While it’s key to put as much into your ISAs as you feel comfortable with on a regular basis, you want to be sure that any ISAs you do have are getting good rates – and earning their keep.
At the time of writing, inflation appears to be coming under control, while interest rates remain higher than we’ve experienced for many years. That’s predicted to last for another six months. However, once interest rates begin to fall, your savings or investments will be slowly losing value over time. Especially if inflation suddenly outpaces them again.
Cash versus Stocks and Shares ISAs – what’s the latest?
Cash ISAs are still hugely popular, for compelling reasons. They offer easy, simple access to cash. In the 2021/22 tax year (the last year for which figures are available), Cash ISAs accounted for 61% of all accounts; that’s a drop of 920,000 compared to 2020/21. Stocks and Shares ISAs increased by 345,000 in the same timeframe1, which indicates that although we’re feeling more confidence financially, many are still wary of market performance.
Working out which type of ISA is best for you
Cash ISAs are conveniently flexible, as well as being tax efficient. And they’re a source of ready cash if you hit an unexpected expense.
When you invest in Stocks and Shares ISAs, on the other hand, your money has the potential to grow more than in a Cash ISA, especially if interest rates do, as predicted, fall later in the year. If you’re holding a lot of your money in Cash ISAs or savings accounts, you may miss out on growth that could go a long way towards helping you feel financially secure.
You can hold a mix of company shares, bonds, and other assets. Plus, you still won’t pay tax on any gains or income.
But, unlike a Cash ISA, your capital is also at risk, and it’s your personal decision how much risk you feel comfortable with.
Most people opt to invest in funds – mixed portfolios of investments – to spread their risk.
If markets fall, the value of your savings will dip. However, the longer you stay invested, the more you average out the ups and downs of the market. That’s one good reason to invest over the longer term.
Getting the most out of your ISAs
Working out what’s best for you and your family is something that we help our clients with every day. Most people find that a combination of Stocks and Shares and Cash ISAs means they have stability and cash reserves for the short- and medium-term, coupled with potential to create wealth in the longer term.
Here are some key questions to ask yourself about your ISA investments.
How long have you had your Cash ISAs?
If you’ve had any of your Cash ISAs for more than five years, then ready cash may have unwittingly crept into your long-term financial planning. If you’re keeping this money handy to cover unforeseen bills or a rocky patch, that’s a good plan.
But over the longer term, you’re less likely to get the same level of returns and growth that a Stocks and Shares ISA could deliver. Maybe you don’t need to hold as much in a Cash ISA?
It’s also worth considering how important Cash ISAs are in your overall financial plans.
Working out what’s best for you and your family is something that we help our clients with every day.
So do I need my Cash ISAs?
You can put up to £20,000 into a Cash ISA each year, which is very tax-efficient and versatile.
You have the option to split your £20,000 ISA allowance any way you like across a Cash ISA, Stocks and Shares ISA, and Lifetime ISA (maximum of £4,000), for example, as long as you stay within the limit. The government is also considering proposals to introduce a British Stocks and Shares ISA which could add another £5,000 to your annual ISA allowance. The consultation process ends in June.
Keep an eye on the interest rates, though. If interest rates rise, the amount you can save in standard accounts before you start to pay tax on it will reduce. For a standard rate tax payer, if the annual interest on your cash savings exceeds £1,000, you’ll be taxed at your marginal rate.
Are you getting the mix right?
To really make the most of the tax perks of ISAs, it’s usually best to invest in assets which have the potential to do better over time – and that means stocks and shares.
A Cash ISA for the short- to mid-term, and a Stocks and Shares ISA for the long-term, may be the right mix for you and your family’s future goals.
We understand however that investing more in a volatile stock market can feel daunting, even for experienced investors. So, do talk to your financial adviser about your ISAs to make sure they fit with your ‘bigger picture’ financial plans.
We can help you work out how much you want to hold in cash, and how much you feel confident in investing in stocks and shares to give you the best chance of a future that’s everything you imagine.
Thinking of changing your ISA mix? ISA watchouts: what you need to know
- If you have multiple ISA accounts, you may find it easier to keep track of them if you consolidate them into one plan.
- If you transfer as cash, you’ll be out of the market until the transfer is complete. You won’t lose out if the market falls, but your money won’t be subject to any income or growth if the market rises in this period. If you transfer a fixed rate Cash ISA before the end of the term, you may have to pay a fee.
- If you’re transferring funds from a Stocks and Shares ISA, you’ll remain invested until the transfer. You’ll be unable to switch or sell these funds while the market falls or rises during this time.
- It’s possible, where appropriate, to transfer money out of existing Cash ISAs into a Stocks and Shares ISA without it reducing your allowance for the current year.
- You should also be aware that your current provider may charge exit fees.
Keeping a close eye on your ISAs
Having a regular catch-up with your financial adviser is always a good plan, especially if your long-term plans or family circumstances have changed or are likely to change in the next 12 months.
There’s always time to make some tax-smart tweaks to your ISAs and investments – your family will feel the benefit.
Want to see how much your ISA might be worth? Try our ISA calculator to find out.
The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.
An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
Neither Lifetime ISAs or Cash ISAs are available through St. James’s Place.
Sources
1Gov.uk published June 2023. Accessed November 2023
SJP Approved 19/02/2024