Cash or Stocks & Shares ISA’s

Posted by Geoff Dyckes on Jun 1, 2011 in Investments

The 2011/12 tax year brings with it the opportunity to place an increased amount of tax sheltered money within an ISA, as the maximum limits have been increased from £10,200 to £10,680, of which up to 50% (£5,340) can be held within cash ISAs.

The type of ISA to choose should give full consideration of the individual’s objectives.

Cash ISAs offer a secure, safe haven for your money that builds up tax-free. They are available from an extensive number of financial institutions who are eager to get hold of your money.

However, there are inherent risks involved with placing monies in cash ISAs:

•It is common practice for providers to offer attractive headline rates for typically one year, after which the rate falls back to a fraction of the headline rate, with the provider hoping that the consumer fails to react to this lower rate on the anniversary, providing the institution with greater profit margins.
•With the March Consumer Price Index (CPI) measuring inflation standing at 4%, and the Bank Of England Base Rate stalling at 0.5% over the past year, this has had the effect of dampening the cash ISA rates available on the market. This has ultimately led to cash ISAs being extremely uncompetitive as a hedge against inflationary pressures.
Stocks & Shares ISAs offer the opportunity for your money to provide inflation-beating returns over time by investing monies across different asset classes, such as shares, commercial property and fixed interest securities. These asset classes are often held within funds from fund providers. This can be a welcome benefit in a low interest rate, increasing inflationary environment.

However, as you would expect, such an option also carries risks:

•Capital returns are not 100% guaranteed and carry varying degrees of risk dependent upon the type of investment chosen.
•Because of the lack of a 100% capital guarantee, the investment is not as transparent as a cash ISA.
Whatever option is chosen, it is important to note that there is no guarantee that the current Coalition Government will maintain such generous allowances indefinitely. ISAs are therefore very important to consider if you have surplus income or capital.