May 25, 2024

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Is cash ISA better than a savings account in the UK

Isas back in fashion as 13 million people open a new account | Money | The  Times

As we approach another tax year-end, savers and investors across the country no doubt have a firm idea of whether or not they want to put their money into ISAs. 

What’s the difference between ISA and a savings account

Firstly, what is an ISA? 

It stands for Individual Savings Account, and it’s a great way to help you improve your financial security.

Many young people open either a cash ISA or stocks and share ISA, but which one should they go for? 

The answer may vary depending on the individual. There are some pros and cons of both that can be identified:

Cash ISAs generally offer more favourable interest rates than regular savings accounts because you’re locking your money away for more time. 

It means it could grow more, meaning you would earn more interest. However, this is only in comparison to regular savings accounts. 

The interest rates on cash ISAs are generally less than what you would find in the stock market, so if your goal is to invest in something with a higher rate of return, then you may want to consider stocks and shares over cash.

But if you’re looking for an answer as to whether it’s better to invest in cash savings accounts than ISAs, then there’s more than one correct answer.

It would help thinking about why you want to put your money into either. 

Both types of accounts offer some form of tax efficiency (and sometimes even tax-free interest), and which one works best for your situation will depend on your circumstances. 

Electronic investment funds

If we look at investment funds that are available electronically or open online, a savings account will gain an advantage over an ISA in some cases. 

Both of these offer easy access to your cash, although there are some limitations on the latter. 

For instance, while you can generally withdraw money from a savings account at any time without notice, with an ISA, you may have to notify the provider before you can remove funds from it. 

It’s purely down to preference as to whether this matters or not – savers often value being able to get their hands on cash immediately and without hassle. 

Having more time

At the same time, investors may prefer knowing they’ll have more time to decide how best to use their money.

That said, if we’re talking about fixed-term products such as fixed-rate bonds and fixed rates, an ISA will always be more attractive, assuming it’s available at the same rate as a savings account. 

It is because you’re sure to benefit from any tax-free interest that you’re due, even if rates do rise in future. 

Some providers offer savers and investors the chance to transfer their cash between both of these accounts depending on whether they think rates will go up or down; this can help them make the most of returns and retain their flexibility at the same time.

How much money do you have to invest

You’ll also need to consider how much money you’ve got to invest before you choose which route to take – only so many people have hundreds of thousands of pounds sitting around waiting for them. 

ISAs are generally reserved for more significant investments, while some providers give savers and investors the same allowance.

It’s also worth remembering that you can access both types of accounts via several channels, such as by phone or post. 

It is excellent news for people who like to do most of their banking online but want a backup plan if anything goes wrong.     

In short, it’s down to you whether you want to put your money into a cash ISA or a savings account. 

The ideal solution will depend on how much money you have to spare, what type of investment you’re looking for and where your priorities lie when making withdrawals from these accounts. 

But if all else fails, you can always go for both.

Many people who are just starting in life look at the possibility of investing money as an exciting prospect.

Link to Saxo Bank for more information.