Why choose Stocks & Shares ISAs over Cash ISAs?
An Individual Savings Account (ISA) is a “wrapper” that shelters the investments it holds, from tax. You can hold (almost) any investment you like inside them. Dividends are not subject to additional tax, interest on Bonds is not taxed, and Capital Gains are not taxed.
Our view continues to be that clients should decide upon the desired level of cash “emergency” reserves they require, and retain this in a (convenient) bank or building society account, preferably one that pays a reasonable rate of interest. Any surplus cash should, in most cases, then be allocated to so-called “Stocks & Shares” ISAs, NOT “Cash” ISAs.
Some of our reasons are listed below:
- The “Stocks and Shares” description is a little misleading, as these ISAs can in fact invest in a wide range of investments, from 100% shares to 0% shares, Corporate Bonds, Government Bonds (e.g. Gilts), Commercial Property, Absolute Return, Fund of Funds, Multi-Asset etc., typically via “Collectives”, such as Unit Trusts, Investment Trusts or Open-Ended Investment Companies (OEICs).
- The risk of course increases and Stocks & Shares ISAs, unlike Cash ISAs, can fall in value, as well as produce potentially far higher returns than Cash ISAs. Risk aside, our main reason for recommending “Stocks & Shares” ISAs over “Cash” ISAs is because we believe that investing in Cash ISAs is a “waste” of your annual ISA allowance. This is because currently (2012/13 tax year) you are allowed to invest £11,280 in ISAs, which can be split between a Cash ISA and a Stocks & Shares ISA (£5,640 i.e. 50%) OR £11,280 solely in Stocks & Shares ISAs. (Please note you cannot invest £11,280 solely in Cash ISAs).
- The maximum return available from a Cash ISA is rarely much greater than the bank’s pay out on their normal bank accounts (indeed recently the Office of Fair Trading publicly criticised banks for paying less on their Cash ISAs than on their non-ISA bank accounts!).
- In contrast, the maximum return from a typical Stocks & Shares ISA can be far in excess of Cash ISA returns. My point here is that I would want my biggest investment return to be free from tax, not a modest one. There are of course no guarantees of a big return ever being achieved, but you are certainly severely restricting the potential amount of tax free gain achievable if you invest in Cash ISAs.
- Another point is that as we encourage our clients to make use of their Annual Capital Gains Tax exemptions, (typically via Wrap “Personal Portfolios”), and so saving additional monies in a CGT-free wrapper like an ISA, increases our scope for providing you with Tax-free returns during your lifetimes.
- Most ISAs (including Wrap ISAs) do not penalise you for encashing or making withdrawals from an ISA. Cash ISAs however, are more likely to apply a penalty or exit charge (especially Fixed Term Cash ISAs).
- Whilst the more tax you pay, the more likely you are to benefit from the ISA tax rules, even Non-Taxpayers can benefit, but should weigh up the pros & cons in the light of their own circumstances.
- Couples now can save up to £ 22,560 between them into Stocks & Shares ISAs for 2012/13; this figure is halved for Cash ISAs.
- The current historical low Bank of England base rate (0.5%) & correspondingly low Cash ISA returns, makes Cash ISAs less attractive as an investment than a few years ago.
- You can also now transfer your previous years’ Cash ISAs into Stocks & Shares ISAs without affecting your current year’s ISA Allowance. (You can also transfer your current year’s Cash ISA to a Stocks & Shares ISA, provided you transfer the whole amount).
Where we would prefer Cash ISAs to Stocks & Shares ISAs, is where clients only intend to save for a short-term need (e.g. a holiday) or where you need to be certain that you will get your capital back (e.g saving for a house deposit). For most of our clients, this is not a problem.
Adrian has a perceptive understanding of our financial situation, gives common-sense advice and is skilful in steering us in the direction he knows to be most suitable for us.Mr & Mrs S - Solihull