Those who use a current account are unlikely to be making the most of their money. Interest rates tend to be low, and there are far better options for maximising your earnings and taking full advantage of them. Foremost amongst them is the individual savings account, more commonly referred to as an ISA.
ISAs are interesting in that there are two distinct types: a cash ISA and a stocks and shares ISA. It is entirely down to you as an investor to decide whether you want to use your total annual allowance to invest in just one, or whether you would prefer to split it between the two.
If you’re interested in opening an ISA of your own, but you’re unsure of how to choose the right one for you, then here is a brief guide to help you make up your mind…
What is the Difference Between a Cash ISA and a Stocks and Shares ISA?
Cash ISAs and stocks and shares ISAs are quite different, and the best way to explain the variations between the two is simply by providing you with a definition of each.
Firstly, cash ISAs. A Cash ISA is a similar instrument to a standard savings account, except that you’re not expected to pay tax on any interest that you earn. This means that you get to keep your profits all to yourself, which is a major boon when comparing ISAs to alternative savings options.
Stocks and shares ISAs are a little more complex. Rather than being an ordinary savings account, they get you to invest your money on the stock market. This means that there’s the potential to earn significantly more than you can with a cash alternative, but it also means that there are greater risks associated with them. The tax benefits are a little different too: although you won’t be expected to pay tax on any profits you earn, you will have to pay it on dividends.
Which ISA is Best for You?
Once people understand the differences, there is one question that they tend to ask: which ISA would be best for me? The answer is not a simple one, as it largely depends upon the individual.
The main thing to assess is your approach to risk. Are you willing to risk the funds that you invest on the possibility that you could increase them significantly, or would you rather ensure that they’re safe and earn a more limited return? If the answer is the former, then go with a stocks and shares ISA; if the answer is the latter, a cash option might be best. If you’re undecided, then remember that you can always split your allowance between the two.
Do your research and correctly identify which option is best for you, and then simply sit back and wait for your funds to grow.
Written by Ben Barlow