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?
For more information on ISAs as an alternative saving option, please click here.
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.
Subscribe to Saga's FREE weekly email newsletters for more of the articles you love, delivered straight to your email inbox.
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.
Saga Share Direct, provided by Equiniti Financial Services Limited, is a low cost share dealing service with no annual account management fees and flexible trading options. Some investment types may have their own fees. Aged 50 or over and would like more information?
Shares are high‐risk investments. Share prices and the income from them can fall as well as rise and you may not get back the full amount invested. Saga Share Direct does not offer advice. If you are unsure whether this service is suitable for you, please consult a financial adviser.
Next article: Can a spouse inherit an ISA? >>>
Subscribe today for just £12 for 12 issues...