Comparing cash ISAs vs investment ISAs you’ll be able to decide which is best for your current circumstances and savings goals, or if in fact you could benefit from putting money into both.
On this page you will find:
- What’s the difference between cash & investment ISAs?
- What’s better: cash ISAs vs investment ISA?
- Investment ISA vs cash ISA: returns?
- Benefits and drawbacks of a cash ISA
- Benefits and drawbacks of an investment ISA
- How do ISAs generate returns?
- FAQs
Want to know more about ISAs? Read our guide on how to invest in an ISA.
What’s the difference between cash & investment ISAs?
With a cash ISA you get a fixed return on your savings, known as the interest rate. With an investment ISA your savings are invested, meaning their value could go up or down and you could get a higher return than cash.
What’s better?
A cash ISA is better for you if you don’t want to take any risk with your savings. You are guaranteed to get a certain return, plus your money back.
Cash ISAs have become more attractive for savers in 2023. This is because interest rates on cash ISAs have improved as the Bank of England has increased the Base Rate.
The best cash ISAs are offering around 6% returns in July 2023, better rates than seen in the last 10 years. But this is still below inflation (7.9% in June 2023), meaning your savings in a cash ISA will still be going down in value in real terms.
An investment ISA is better for you if you are happy to put your money at risk of going down for the chance to see it potentially increase much more than the interest rate offered on a cash ISA, over time.
Personally I think it is a good idea to have both. Keep money you don’t need for at least five years in an investment ISA to benefit from stock market returns, and some in an Easy Access cash ISA to gain from the interest rate until you need the money.
ISA Returns
Over time returns are typically higher in an investment ISA.
For example, AJ Bell, a wealth manager, calculated for £10,000 in a cash ISA over the last 10 years the return was £1,181. By comparison the average returns from a UK Equity Income fund (which can be held in an investment ISA) in that time was £6,676.
AJ Bell’s senior analyst Tom Selby says: “Harnessing the power of investing and compound growth is particularly important over longer periods of time as inflation can eat away at the value of your cash savings.
A long time horizon of five or 10 years plus gives enough time to ride out any periods of short-term volatility that might be experienced when investing in the stock market.”
Cash ISA and investment ISAs compared
| Cash ISA | Investment ISA |
| Money is not at risk | Your money is invested in stocks and bonds |
| Guaranteed fixed returns | Riskier – you could lose money |
| Returns are below inflation, meaning your savings are losing value in real terms | Unlimited returns if your investments perform well |
| Better for people who need instant access to their money | Better for people who don’t need their money for at least five years |
Benefits of a cash ISA
- Guaranteed rate of return (interest rate)
- Your savings are not at risk of going down
- You can save into a cash ISA and an investment ISA in the same year (up to your £20,000 allowance)
- Gains you make are yours to keep tax-free
- Your invested savings can increase in value by an unlimited amount
- You can choose what you invest in
- You can save into an investment ISA and a cash ISA in the same year (up to your £20,000 allowance)
- Gains you make are yours to keep tax-free
Drawbacks of a cash ISA
- Returns are capped – you can’t make more than the fixed interest rate
- No cash ISAs beat inflation, meaning your savings are losing money in real terms
- You’ll need to lock your money away for up to five years to get the best rates of return
- Withdrawals per year will be limited (unless you get an Easy Access ISA)
Drawbacks of an investment ISA
- You could lose all your money
- You may need to withdraw money in a falling market, forcing you to sell your investments for less than you paid for them
- Fees and charges tend to be higher than cash ISAs
How do ISAs make you money?
Cash ISAs and investment ISAs generate returns in different ways.
With cash ISAs your ISA provider pays you a fixed rate of interest in exchange for you leaving the money in their account, the same way your bank would pay you a return on a standard savings account.
Investment ISAs generate returns, in terms of dividends and capital gains, by investing your money in funds it chooses, or investments you choose yourself. If the value of your investments goes up, so does the value of your ISA savings.
- Ready to invest in an ISA? – Compare the best stocks and shares ISA accounts here.
FAQs
Yes. The total amount you can save and invest into ISAs per tax year is currently (2023/24) £20,000. This is known as your annual allowance. But you can split this however you want between the three types of adult ISA; cash ISA, investment ISA, and innovative finance ISA.
You can only open and pay into one of each type of ISA per tax year.
You can save up to £20,000 per tax year into a cash ISA. This is your total allowance.
This allowance doesn’t roll over, so if you don’t use it all in a single tax year you lose it.
You can save up to £20,000 per tax year into an investment ISA. This is your total allowance.
This allowance doesn’t roll over, so if you don’t use it all in a single tax year you lose it.
The main difference between an ISA and a standard investment is that any gains (returns) you make from your savings and investments within an ISA are tax-free.
Outside of an ISA, gains (over certain limits) are subject to tax.
There is no limit to the gains you can build up in an ISA tax-free. No matter how much you achieve in returns, when you withdraw the money there will be no tax to pay.
