An ISA should be the very first point of call for anyone when starting to save or invest, but one of the first things you need to think about is do I want a Cash/Savings ISA or is an Equity/Investment ISA the most suitable for me.
The answer isn’t as technically complicated as you might at first think you just need to ask yourself a couple of questions;
- Why are you putting money away?
- When do you think you will need to access the money?
Why are you putting the money away?
If you’re trying to build up a pot of money so that you can meet the expenses of an unexpected bill or other financial hiccups then a Cash ISA is the first type of account you should consider. It’s stable, easily accessible and always there when you need it.
If however, you’re wanting to build up a fund to use in the future either to provide you with an income later in life, to meet a specific financial goal such as covering the kids or grandkids university costs then an Equity or Investment ISA is likely to be much more appropriate. The return is likely to be a little more volatile but over time should be greater so you have to put less in to get more out.
When do you think you will need to access the money?
If you believe that you might need access to your money in less than 5 years then a Cash ISA will most certainly be the best option for you.
However, if your target is way off in the future then an Investment ISA is likely to be a far better option. The longer you are willing to hold an investment for the poorer value it makes cash ISA look in comparison to an Investment ISA.
The real return on cash savings can be quite poor in times of high inflation (such as now) and low-interest rates (such as now). Real return refers to the rate you are receiving on your savings or Cash ISA minus the current rises in the cost of living (inflation). Currently (December 2013) the Retail Prices Index (A traditional measure of inflation) is running at 2.7% per year and the top-rated instant access cash ISA is 1.51% per year. So in real terms, the value of the money invested in that account is being reduced by 1.09% per year due to inflationary erosion. So even though the saver has achieved one of the best rates on the high street the value of their money is still falling. Now if this is short term savings for an emergency etc. then that is something you just have to accept, but if this is money that won’t be needed for many years perhaps you should consider if an equity/investment ISA would be more prudent. You should take advice from an adviser, such as myself, before entering into any form of long term investment.
Below you will see an interesting graph, it shows the change in the value of £100 invested in either UK Equity or saved in cash since 1958.
By 2010 the £100 invested (blue line) is worth £46,246 and the £100 saved (red line) is worth £4,422 it’s a sizeable difference. You can download a full break down of each year’s return below.
{phocadownload view=file|id=1|text=Full Historic Breakdown|target=s}
The graph also serves to illustrate why investment ISAs are for longer-term savings as the values do rise and fall, so time is your greatest asset when investing. There are things that I as a financial adviser will do when planning an investment portfolio for you to smooth the volatility into something you’re more comfortable with (and I can show you the historical trend of the blend of assets I recommend you) but I think this serves as a nice graphic illustration of the differences between investing and saving. Of course, you must always remember;
“Past performance is not a guide to future performance.”
The clock is ticking on this year’s ISA allowance, so contact me as soon as you can if you don’t want to waste yours. Remember if a face to face meeting isn’t possible I can still help via the phone, email and even Skype these days!
You can read more about ISAs by downloading the guide over at www.the-isa-adviser.co.uk