What are the different types of ISA?

Holly Thomas / 24 February 2015 ( 30 October 2018 )

ISAs are a simple and flexible way to save, whether you choose a cash ISA or a stocks and shares ISAs but what are the differences?

ISAs are a breath of fresh air in the world of personal finance. Why? Because they are simple and flexible. 

Not sure what an ISA is? Read our guide.

In July 2014 they became even more attractive. The Government actioned not only an increase in the amount you can squirrel away in them, but they also made it so that for the first time, you can put all full amount in a cash ISA - which, as of April 2017, is £20,000.

As before, you can still opt to invest the whole lot in an investment ISA.

So how do you decide how to split your money?

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What are cash ISAs?

A cash ISA would typically be held in a bank or building society. It’s a straightforward account which pays an interest rate. Unlike other savings accounts, no tax will be deducted. Everything earned is yours.

People who hold their money in cash are those too cautious to entertain risking their money in the stock market, or those who might want to draw on it in the next couple of years.

You can either opt for an easy access account or for a better rate, a fixed rate account which means locking your money away for a set period. If you opt for a fixed deal, be sure you don’t need to get at the money, as early withdrawal can come with interest penalties.

Some stocks and shares ISA providers may allow you to hold cash tax-free within your stocks and shares ISA. But you're free to open separate accounts, if you prefer.

Read more about transferring ISAs

What are stocks and shares ISAs?

Investing in the stock market means taking more risk with your money. Yet those who have stuck with cash have seen the damaging effects of low interest rates that have been rooted at 0.5% since March 2009, and dropped further in August 2016 to 0.25% in the wake of Brexit. 

Savers often think of cash as a safe haven but due to inflation, its value can be eroded and give a negative return.

Those with a longer time scale for getting their money to work hard, before they need it, should look to build an investment portfolio.

Savers need a balanced portfolio that uses a mix of investments across different sectors, regions and investment styles. You can invest in individual stocks or leave stock picking to the experts and invest in a fund which holds a number of stocks.

Pay attention to fund charges applied to your ISA. – don’t pay over the odds by just going to your bank. Do some research and see where the value for money is.

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Mix 'n' match ISAs

You might want to split the allowance between cash, stocks and shares and innovative finance ISA with any split you feel comfortable with. 

The only rule is that, combined, your tax-free ISA savings in the tax year must not exceed £20,000.

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Next article: Can a spouse inherit an ISA?  >>>

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.