15 October 2013

Why you should avoid Cash ISAs

Let's be clear who this blog applies to first... If you have any investments or intend to have in the near future then this is for you.

Question: Why are ISAs a Good Thing in general?
Answer: Because you don't pay Income Tax or Capital Gains Tax on any income or growth. (You may still have to pay Inheritance Tax but let's ignore that for now.)

So if you have a Cash ISA, you don't pay tax on the interest you receive. But since interest rates are pretty poor at present you don't get much tax to pay, and so there isn't much advantage in a Cash ISA.

In fact, there is a disadvantage if you are an investor. There is an annual limit on how much you can put into ISAs* and if you use your Cash ISA allowance that comes out of your Stocks and Shares ISA allowance. And that can be rather significant - if you expect your Stocks and Shares ISA to grow then there is potentially much more value in those than in a Cash ISA.

So the end result is you save yourself a small amount of tax in a Cash ISA but lose a large amount of potential growth in a Stocks and Shares ISA. The one saving factor is that you can transfer a Cash ISA into a Stocks and Shares ISA later, but in general - avoid Cash ISAs.

* currently (2013/14) £11,520 for a Stocks & Shares ISA, and £5,760 for a Cash ISA

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