By - Bank of England figures show the average Cash ISA rate over the last year has offered 2.71%, so £1,000 saved this time last year would have grown to £1,027. Over the same period, the same sum invested in a global tracker fund held in a Stocks & Shares ISA might be worth £1,193.
- Over five years, the average Cash ISA earning the average interest rate would have grown to £1,051, while the same sum in the same period invested in a global tracker fund might be worth £1,833.
- Over ten years the average Cash ISA earning the average rate would have grown to £1,090, while the same sum in the same period invested in a global tracker fund might be worth £2,243.
Ben Chapman, product manager, Hargreaves Lansdown:
“Choosing between a Cash or Stocks and Shares ISA this year is like choosing your favourite child. They both have a lot to offer, but they’re very different beasts. Each one will have their days in the sun and go through some trickier times. And in many cases, the answer is the same as it for many parents: both.
The underlying DNA of each kind of ISA is the same. You have a £20,000 you can put into either, the money in an ISA is protected from tax, and you have the flexibility to transfer from one to another or withdraw your cash at any time. However, each has their own quirks.
Why opt for a Cash ISA
The interest from Cash ISAs is guaranteed, and if something was to go awry, the first £85,000 with each institution would be protected by the FSCS. If you need a specific sum of money in the near future, cash is often the most sensible home for your money.
We should all be building emergency savings to cover 3-6 months’ worth of essential expenses in case of emergencies. You need to be sure this money will always be easily available, so an easy access Cash ISA is a useful home for it.
Over the past year, a global tracker fund outperformed the average Cash ISA rate. However, if you are just holding it for a year, stocks and shares can rise and fall in value, and some years will be better than others. It’s why any money you need within the next five years should be saved rather than invested, and a Cash ISA is good place to start.
There are some attractive rates on offer right now. Cash ISA rates have come down from the peak, but we’re still enjoying an ISA season with some of the highest rates we’ve had over the past decade. Right now, you can make around 5% on a short-term fixed rate Cash ISA, without taking any investment risk.
Why opt for a Stocks and Shares ISA
Although the value will fluctuate, over the longer-term stocks and shares tend to outperform cash. Over the past five years, £1,000 invested in a global tracker fund would have earned an extra £833 in a Stocks & Shares ISA, while in a Cash ISA it would have earned £52. Over ten years the difference is even more striking, because the investment would have added £1,243 to your original £1,000, while in the Cash ISA would have added £90. If you’re putting money aside for the long term, investments stand a better chance of beating inflation and delivering growth than cash.
Why the answer may be ‘both’
As with comparing children, in reality, in most years you may well need to put money into savings and investments at the same time. Most of the time there’s something on the horizon to invest for and something round the corner that requires savings. There’s nothing to stop you mixing and matching, while benefitting from tax savings in an ISA.
The rules let you hold one of each kind of ISA in the current tax year – and as many of each as you like from 6 April. In fact, HL has a multi-bank Cash ISA where you can hold your money in different accounts with different banks, all within the same ISA – so you can spread your money around this tax year too.”
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