An ISA – or Individual Savings Account – is a great way to make your savings go even further, as your returns (the interest you make) are tax-free. It’s a good idea to check the yearly tax limit, as this affects how much you can add to each type of ISA. Currently you can pay up to £20,000 into an ISA. While a LISA (Lifetime ISA) is specifically for saving for a first home or building a retirement fund, Cash ISAs and Stocks and Shares ISAs are a little more flexible.
What’s a Cash ISA?
It’s simply a way to save up money without having to pay income tax (and it won’t count towards your Personal Savings Allowance, either). Each tax year, you can put away a maximum £20,000 – known as an ISA allowance – which can be spread across all your ISA accounts.
Why choose a Cash ISA?
It can be a great choice if you’re looking to grow your savings each year, as it’s a tax-free, risk-free option. That’s because the interest you make won’t be subject to changes in the market (unlike the returns from a Stocks and Shares ISA). A Cash ISA is also covered by up to £85,000 by the Financial Services Compensation Scheme (FSCS), so if your provider folds, you should get some, or all, of your money back.
What about a Stocks and Shares ISA?
These can be ideal for long-term savers, with many keeping your money ‘locked in’ for at least five years. Any money you deposit is put into asset-backed investments – their value, and the return you make, depends on the market, so could go up or down. This means that while in some cases you could boost your savings, in other situations, you might get back less than you put in. Like with a Cash ISA, you’ll also have some FSCS protection under the same terms – though it only covers up to £50,000.
Why choose a Stocks and Shares ISA?
We don't offer a Stocks and Shares ISA at Beehive Money, however they can be a good option for those wanting to take the risk and potentially make more money on their savings, with a variety of ways you can invest your money. As Stocks and Shares ISAs can be more risky, with market conditions affecting how much you make (or lose), we suggest talking with a financial adviser if you're looking into one.
What’s the best choice for me?
With Cash ISAs, it’s a case of ‘what you see is what you get’, as you’ll know exactly how much interest you’ll earn during the tax year. Stocks and Shares ISAs offer you the opportunity to use different types of investments with returns fluctuating with the market, have a degree of risk but can give you a bigger return and help you save money over a longer period. Of course, you can open, and use, both types of ISA – as long as you stay within the £20,000 tax year limit.
What’s my next step?
A good place to start is setting yourself a few savings goals and working out what’s achievable in the current tax year. A financial adviser can also give you some pointers. And if you decide an ISA is right for you, take a look at what savings accounts have on offer at Beehive. We’ve summed up the key points in the table below to help guide your thinking.
|Cash ISA||Stocks & Shares ISA|
|Which ISA is suitable for short-term saving goals?||Y||N|
|Which ISA is suitable for longer-term saving?||Y||Y|
|Does this ISA have substantial risk? Could I get back less than I invest?||N||Y|
|How much is protected by the FSCS?||£85,000||£50,000|