Q

What is a cash ISA?

A

It's like a tax-advantaged savings account.

ISA, short for Individual Savings Account, is an ingenious little tax saving account you should absolutely open if you haven’t already. Why are we such fans? Because, currently, anyone over 18 may put away £20,000 every year without ever having to pay any tax on its interest or gains.

Cash ISAs are one of the two most common types of ISAs and the one you’ve probably seen advertised inside your local bank branch. (And you only have to be 16 to open a cash ISA.) Apart from the tax advantages, they’re pretty much the same thing as old fashioned savings accounts. In the very short term, cash ISAs are useful places to park your money if you expect that you’ll need to access it right away. You won’t ever lose money in a cash ISA — the FSCS insures cash ISAs up to £85,000 in case of bank failure. But neither will you ever make much money in a cash ISA since the average interest rate banks offer is currently less than 1% annually. Plus, with last year’s introduction of the personal savings allowance (PSA), cash ISAs may not always be a particularly good idea for basic taxpayers.

If you’re a long-term investor — that is, you plan to hold onto the money for at least five years — it would be an absolutely terrible idea to keep a lot of money in a cash ISA since the interest the account pays won’t even keep pace with inflation, and over the long term, your money will actually be worth less than when you deposited it. In the case you don’t need to access the money right away, you’ll instead want to consider a stocks and shares ISA, which will naturally be more volatile than a cash ISA in the short term, but will offer the opportunity for high returns in the long term. (If you need some, but not all of your ISA funds, you might consider dividing your money between a cash and stocks and shares ISA.) If it’s a stocks and shares ISA you’re seeking, Wealthsimple would be happy to set one up customized for your specific financial needs.

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