Investment ISA vs Cash ISA

POSTED ON Wednesday, 05 August, 2020

So, you’ve heard about all the benefits that opening an ISA can give you, and you’d like to take advantage of the tax-free savings you can make. But, which type of ISA will work best for you: a Cash ISA or an Investment ISA? The answer to this depends on who you are, and what you’re looking to get from an ISA – but we’ve got all the information you need to make that choice.

An ISA is an excellent way to make sure that your savings are kept safe from the tax man in a tax-free wrapper. They’re a very attractive way of saving, but for a first-time ISA saver, it can be a bit confusing to try and decide which type of ISA is right for them. So, we’ve broken down everything you need to know to figure out which type of ISA suits you best.

What’s An ISA?

An ISA is also known as an individual savings account, the returns of which are kept safe from the taxman. These are regulated by the UK government who impose an annual “ISA allowance”: a cap on how much money they can put into one or more ISA accounts each year.

The maximum allowance for this current tax year 2019-2020 is £20,000 per person. You can choose whether you put all of that £20,000 into a Cash ISA account or spread it across different types of ISA accounts.

There are lots of different kinds of ISA accounts, including:

  1. Cash ISAs
  2. Investment ISAs
  3. Lifetime ISAs
  4. Innovative ISAs
  5. Junior ISAs

What is the difference between a Cash ISA and an Investment ISA?

A Cash ISA

A Cash ISA is perhaps simplest to understand because it’s basically a cash savings account – similar to a bank savings account you might have alongside your current account. Interest accrues within the account in much the same way as it does within Savings Accounts.

There are lots of different types of Cash ISAs, including:

  1. Instant access
  2. Fixed-rate deals
  3. Regular savers

An Investment ISA

An Investment ISA is generally a more long-term option. Your money will be put to work in an investment (as the name would suggest). You can choose between having an actively managed fund or a passively managed fund, depending on your preference.

Those investments should put your money into various stocks and shares, which should garner returns for you.

Why Should I Get a Cash ISA?

Whether a Cash or an Investment ISA is the right choice for you will depend on the type of person you are, and what your financial needs are. 

You might want to look at getting a Cash ISA if…

  1. You’re not particularly wanting to invest but still want to get the benefits of an ISA, then a Cash ISA should be for you. 
  2. You know you may want access to the money sooner rather than later
  3. You know you may need access to your funds at a fixed point (i.e. 1 or 2 years) 
  4. You have a low risk tolerance, as Cash ISAs are lower risk than Investment ISAs 

Why Should I Get an Investment ISA?

You might want to look at getting an Investment ISA if…

  1. You’re looking to invest your money rather than just putting it into a tax-free savings account, then an Investment ISA is for you.
  2. You’re already an investor and want to diversify your portfolio
  3. You have a high risk tolerance
  4. You want to take advantage of higher rates of interest offered by Investment ISAs. 

Can’t I have both?

Yes, you can! 

There is nothing stopping you from opening both a Cash and an Investment ISA, if you so wish. This can be a good way of diversifying your portfolio whilst also maintaining access to some of your funds through an Instant Access Cash ISA, for example. 

Read more about Investment ISAs.

Read more about Cash ISAs