ISAs and the tax year end.

The tax year end is fast approaching – 5th April. This can present a timely reminder to review your mix of cash ISAs and stocks and shares ISAs making sense for your short, medium and long-term plans. It is also not too late to start investing into an ISA if you haven’t already done so.

Cash ISAs and stocks and shares ISAs

Cash ISAs and stocks and shares ISAs are two types of Individual Savings Accounts in the UK. Cash ISAs are similar to regular bank accounts but offer tax-free interest. Stocks and shares ISAs, on the other hand, allow you to invest in a variety of assets, like equities (shares), bonds and funds, with potential for higher returns but also higher risk. The choice can be dependent on your risk tolerance, investment preferences, financial goals and investment horizon – time. 

It could be that interest rates in the U.K. have now peaked (currently 5.25% at the time of writing) and inflation is on a downward trajectory (4% at the time of writing). Finding the right balance between investing in a mix of cash and stocks and share ISAs may therefore give your money the best chance for greater growth. With inflation looking to be coming under control, interest rates still remain higher than average. However, once interest rates begin to fall (as expected) your savings or investments could be slowly losing value over time if inflation once again outpaces the average interest rates.

What’s best for me? Cash vs Stocks and Shares ISAs?

Cash ISAs are still hugely popular – and for good reason. They offer easy, simple access to tax-free cash savings. You can also ‘lock-up’ this cash, placing it on term-deposit thus giving you a higher certainty of return.

When you invest in a stocks and shares ISA, your money has the potential to grow more than in a cash ISA. However, unlike a cash ISA, your capital is at more risk, and it is your decision how much risk you can afford to or feel comfortable in taking. As your stocks and shares ISA can hold a variety of assets, most people will select a mixed portfolio of investments which can help spread their investment risk. It is important to note that when markets fall, the value of your capital can also decrease. However, the longer you stay invested, the more you can potentially average out the ups and downs of the market. This can make investing into a stocks and shares ISA the better option – if you have the time.

Working out what is best for you and your family is something that we help our clients with every day. People normally find that a combination of cash and stocks and shares ISAs mean they have stability in the short and medium-term but also the long-term potential to create wealth for their futures.

If you have a cash ISA already, how long have you held it for?

If the answer is for more than 5 years, then cash may have unwittingly crept into your long-term financial planning and this could be to your detriment. If you are keeping this money available to cover unforeseen circumstances, that is a sensible financial planning strategy but how much is enough? Over the long-term, you are less likely to get the same level of returns and growth that a stocks and shares ISA could potentially deliver.

Also, keeping an eye on the interest rates (with rates being higher than they have been some years) the amount you can save in deposit saving accounts before you start to pay tax on the interest may reduce as you also now have a savings allowance. Historically, interest paid on savings accounts was taxed at source using the basic rate of income tax. Now, interest is paid gross and there are different levels of savings allowances for non, basic, higher and additional rate taxpayers and you are taxed at your marginal rate of income tax once you exceed your allowance. 

Make the most of your annual ISA allowance

To make the most of your annual ISA allowance (currently £20,000.00), it is usually best to invest in assets which have the potential to do better over time as you will most likely be saving over time – this invariably means stocks and shares. ISAs can also be transferred to another ISA and this does not constitute a contribution and so this can be a helpful option if you need to rebalance your overall cash and stocks and shares ISA holdings.

So before the end of this tax year, it may be worth having a chat with one of our Dentons Wealth independent financial advisers about your own ISA plans as don’t forget - it is a case of ‘use it or lose it’ when it comes to your annual ISA allowance.