Are Cash ISAs worth it?

Can a Cash ISA account save you money in the long run – or would an investment account serve you better? Let’s weigh up the ISA options that make your money work harder.

| 6 min read

How does a Cash ISA work?

The Cash ISA, standing for ‘Individual Savings Account’, has been a very popular product for years, providing the ability to keep a chunk of savings away from tax every year.

It’s like a savings account at a bank or building society, but there is no tax on the interest that is paid. As with a savings accounts you can either opt for an easy access account where you can take your money out at any time, or a fixed term product that may offer a higher return but locks your money away for a stated period.

Should I get a Cash ISA?

Cash ISAs might be tax free but at times when interest rates on cash are low they can be return free too, though more recently they have been rising to combat higher inflation. It begs the question – could cash tucked away Cash ISAs or standard savings accounts be working harder?

The answer is almost certainly ‘yes’, but only for those happy to take some risk and commit for the long term. The spending power of cash tends to go backwards over time – and there’s reason to believe the erosion of its value will not let up over the next few years. Other assets – such as company shares – don’t offer the security of capital, and you could get back less than you invest. But saving too much in cash could be more damaging to your wealth than taking risks with investments, even though it’s a bumpy ride.

When you buy shares, you are buying small slices of companies and get a share of growth and profits. Profits don't always go up and companies can shrink as well as grow. In addition, the stock market rises and falls depending on people's confidence in the economy and in businesses. It’s therefore necessary to think long term and only commit an amount you aren’t going to need in the next few years. Therefore, over short periods in particular, all investments can lose value.

Yet what is higher risk in the short term can be far less so in the long run. A well-managed and diversified portfolio gives you the prospect of decent long-term returns that can drive your wealth forwards rather than backwards. An investment ISA, such as our Stocks & Shares ISA, can therefore provide an alternative.

Cash ISA vs Stocks & Shares ISA

As we have seen a Cash ISA can only hold cash, like a deposit or savings account.

A Stocks & Shares ISA (otherwise known as an investment ISA) can house lots of different types of investments. From individual shares through to funds that invest for you in different areas of the stock market, as well as other assets such as bonds. You don’t have to pay income tax or capital on the returns you get, so they can be a valuable place to store your investments as you don’t have to worry about tax consequences or reporting via a tax return.

If you select this type of ISA, there are charges to pay relating to both the account and the underlying investments.

Can you have a Cash ISA and a Stocks & Shares ISA?

Yes, you can have both a Cash ISA and a Stocks & Shares ISA and your annual tax-free allowance of £20,000 can be divided in any proportion you like between the two.

There’s also no limit on how many of these ISA accounts you hold. Charles Stanley only offers Stocks & Shares ISAs.

When can you transfer a Cash Isa?

Cash ISAs can be transferred between providers, but many investors do not realise it is also possible to switch from a Cash ISA to a Stocks and Shares ISA without losing the valuable tax-free status of their savings – simply by completing a transfer request. It’s possible to switch back again if you need to.

Tax-efficient allowances such as ISAs are often best used for assets that produce a high level of return, either through income or capital gain. For some, Cash ISAs are somewhat redundant anyway. The personal savings allowance introduced from April 2016 means some people no longer pay tax on their savings interest on ordinary bank and building society accounts.

This removed the automatic deduction of 20% from savings income and allows a basic rate taxpayer to earn up to £1,000 in savings income tax-free. Meanwhile, higher rate taxpayers can now earn up to £500 tax free and there is no allowance for Additional Rate payers. However, if you are likely to exceed your personal savings allowance, and you do not plan to use your ISA allowance with Stocks & Shares, then a Cash ISA is worth considering.

Valuable flexibility

The possibility of transferring from a Cash ISA to a Stocks & Shares ISA (and vice-versa) is a valuable flexibility not to be overlooked. The stock market offers a greater opportunity to grow your money and has historically performed better than cash over the long term. If you have not invested before you can use Cash ISAs (or a portion of it) to get started and build the foundations of an investment portfolio. If you are already an investor, you can use it to add to your portfolio.

Find out how you can start your investment journey, with our help and guidance. It is straightforward to transfer your Cash ISA to a Stocks & Shares ISA such as the Charles Stanley ISA, where you can invest in a wide range of funds and shares. Although you should check you won’t incur excessive exit penalties from your existing provider before doing so.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Start your investment journey

Almost everyone should consider investing once they have paid off expensive debts and saved up a rainy-day fund. Find out how to start investing.

See more

The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

More insights

Defence spending increases amid war and global rising tensions
By Charles Stanley
28 May 2024 | 6 min read
General election 2024 – what could a change of government mean for your money?
By Rob Morgan
Spokesperson & Chief Analyst
28 May 2024 | 9 min read
Markets shrug off general election
By Garry White
Chief Investment Commentator
24 May 2024 | 9 min read
Deglobalisation, technology and inflation
By Charles Stanley
24 May 2024 | 7 min read