It’s a debate that many of us have at some time or another in our lives: should we take the plunge and go for a stocks and shares ISA, or look around for the best regular savings account we can find? It can be a hard choice, particularly if you can only afford to save a small amount of money and so want to make the most of it to maximise your chances of good returns.
Let’s take a look at the key points of the shares ISA and ordinary savings accounts so you can decide which would be best for you.
The savings account
As you no doubt know, an ordinary savings account is very simple: once you have opened it, you can deposit money into it and you earn interest on that money. You have to pay tax on the interest you earn and the interest rate can vary depending on the account you have chosen, who your provider is and the Bank of England base rate. You can typically access your money whenever you want with a regular savings account.
The share ISA
By contrast, with a share ISA, you do not have to pay any tax on the dividends you earn. However, this type of account differs dramatically to an ordinary savings account because it is effectively a form of investment. This means that the money you put into it is invested in the stock market and the performance of the ISA is dependent on the performance of the market. Therefore, there is a risk attached to investment ISAs, as well as an annual investment limit, but there is also the potential for good tax-free returns.
Which should you choose?
Now we come to the question of which you should choose: the ISA or the ordinary savings account. A lot of this choice comes down to whether you are willing to take the risk on a share ISA as there is a potential for your investment to fall as well as grow. However, the best stocks and shares ISAs are very careful about where they invest your money and typically take steps to spread the risk, as happens with the FTSE all-share ISA.
This means your money has the best possible chance to grow, and when your ISA is performing well, you can typically expect benefits that outstrip the typical rates of interest you will find on a standard savings account. You might also like to consider the amount you will be saving every year: this is important because of the annual ISA limit. The limit for the 2011/2012 tax year is £10680, which is a significant amount that should be plenty for most people. If you want to save more than this, though, you might need to look at other options, too.
Overall, both ISAs and savings accounts have much to recommend them and so you simply need to choose the one that suits you best. Don’t forget, though, that you could decide to have one of each so you can spread your money – it’s all about making sure you’ve got the right savings products for you and ensuring that you are getting as much as you can out of the money you’re saving for the future.
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