How to Choose the Best ISA – Cash or Stocks?

How to Choose the Best ISA - Cash or Stocks?

by David Redmond on 30 Mar, 2011

If you are in the process of developing a savings plan for yourself or your family and have not started to utilize an ISA yet, it is something you should strongly consider. An ISA provides significant advantages over most standard savings programs, most importantly that any returns you make from the fund are paid tax-free.

Up until 5 April 2011 you can put £10,200 each year into the fund. However, you are only permitted to deposit £5,100 into the cash portion of the fund. You can also place another £5,100 into the stock section if you so desire, or dedicate the entire fund to stocks and shares. This was written into the regulations as a way to stimulate the stock market and provide financing for the companies listed on them. The ISA is set up to meet inflation expectations and in the new tax year 2012-13 you will be able to deposit up to £10,680.

If you are a novice in the financing world and want to set up an ISA it would be a good idea to sit down with a professional and get some expert advice on the subject. If you were to make a wrong decision and started saving early enough in your life the difference in the amount you would have accumulated when you are ready to retire could literally be in the millions of pounds.

A recent study by Money Mall compared interest rates offered by banks and building societies on fixed-rate savings bonds with that paid on fixed-rate cash ISA’s found they pay less interest on fixed-rate cash ISA’s. In some cases this could be up to 1.35 percentage points less. Of course the financial institutions are well aware of this fact since it contributes greatly to their bottom line.

1.35 percentage points may not sound like much, indeed, over a one year period it only amounts to £68.35, over the long term the amount becomes far more significant. It’s this sort of detail that can easily be missed when starting funds without professional advice.

Another example we will look at are the stock funds. Before investing it is important to recognize that not all ISA funds are the same. Some funds provide a very conservative growth plan and only invest in stocks that historically supply most but reliable returns year on year.

Other stock funds are more returns focused and subsequently take greater risks. These funds are far more uncertain, and present more of a chance that your stocks could decrease in value, taking your savings with them.

Of course, if you are of the right temperament to remain calm during wild swings in your portfolio, the returns are far greater than in a ‘steady as she goes’ fund, so this may be the better option for you.

It is very easy to determine after reading a little of the above that investing in an ISA is an exceptional idea, and the earlier you start in life, the more you will benefit when you are ready to retire. However, if you are not a professional in the financial arena it would be an excellent decision on your part to get help from somebody that is.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.