What is the difference between a Cash ISA and a Stocks and Shares ISA – and why would I choose one over the other?
The Stocks and Shares ISA
Prior to April 2008 these were known as Maxi ISAs.
In a Stocks and Shares ISA the full annual limit of £7,200 (£10,200 for those born on or before 5 April 1960) may be invested entirely in stocks and shares or divided between a maximum of £3,600 in cash (£5,100 for those qualifying for the higher limit), and the balance in stocks and shares.
The higher limits apply to all ISA investors from 6 April 2010.
The availability of different components in a Stocks and Shares ISA will vary, and this can be checked with the individual providers.
The components of a Stocks and Shares ISA includes: individual shares listed on any recognised stock exchange, gilts, corporate bonds, unit trusts, OEICs (Open Ended Investment Companies, the corporate-structure version of Unit Trusts), investment trusts and Exchange Traded Funds.
Unit- or investment-linked life insurance policies can be included in an ISA, subject to certain conditions. The life insurance provider will be able to determine which products qualify.
Nearly all funds which essentially invest in stocks and shares qualify for ISA treatment.
If you want to invest more than £3,600 in stocks and shares, and if you are prepared to leave your investment untouched for longer - over 5 years, say - then you should choose a Stocks and Shares ISA.
The Cash ISA
Prior to April 2008 these were known as Mini ISAs.
In a Cash ISA wrapper, investors may hold a maximum of £3,600 (£5,100 at the higher limit) in cash, with the remainder of the £7,200 (£10,200) limit in stocks and shares.
For example in a Cash ISA, an investor may hold a maximum of £3,600 ( £5,100) in cash, with one provider and the remainder of the £7,200 (£10,200) limit in stocks and shares, with either the same, or another provider.
The permitted components of a Cash ISA include: bank and building society deposit accounts, cash unit trusts, any National Savings products that are designed for ISAs, and qualifying insurance policies
If you want different components with different managers, and a lower-risk savings plan, you should choose a Cash ISA.
Note: It is not permissible to take out either two cash ISAs or two Stocks and Shares ISAs in the same tax year.
Life Insurance Bonds
The life insurance component is not offered by as many providers as the other two variants.
The life product inside the ISA wrapper is intended for savings rather than insurance.
The wrapper will cover a range of unit-linked and with-profits savings options.
Most providers favour the with-profits approach for cautious investors who may wish to gain exposure to the stockmarket with a degree of smoothing of its volatile ups and downs.