Are you saving in the right ISA?

Despite bumpy stock markets, the returns on stocks and shares ISAs comfortably outperformed those from cash ISAs over the past year.

Data from Moneyfacts show in the 12 months to February 2022, the average stocks and shares ISA grew by 6.92%, compared to just 0.51% from a cash ISA. Interest rates hit a record low in 2020, resulting in meagre returns on these deposit accounts. However, returns on stocks and shares ISAs are volatile, with a drop in returns from 13.55% in 2020/21.

Cash or stocks and shares?

Many people look to open an ISA at the end of the tax year, or start of the new one, using their £20,000 annual allowance. Cash ISAs are a safe option, and ideal for savings that you might need to access at short notice. But with rising inflation, cash held for long periods of time is likely to lose its value in real terms.

While returns on stocks and shares ISAs in recent years have been attractive, these tax-efficient plans are better suited to longer-term savers who can ride out periods of volatility. Historically at least, equity-based investments are most likely to outpace inflation over longer time frames, maintaining the spending power of your savings.

 

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate tax advice, and tax laws can change.

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