Question: I have a stocks and shares ISA that allows me to hold cash. Would I be better holding my money there than in a cash ISA?
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One increasingly common question is whether it makes sense to hold cash within a stocks and shares ISA instead. After all, if you’re not planning to invest in shares or funds right now, why not simply use the tax shelter while keeping your options open?
Things like your emergency fund or savings for short-term purchases should rightly be in cash but for any long-term savings investing has historically yielded much better returns.
Without doing so, your cash may simply sit in a low or no-interest holding account.
Some money market funds currently yield upwards of 4 per cent, which can be competitive with the best cash ISAs but not all platforms offer access to them, so it’s important to check what your provider allows. People should also be aware that there may be charges so you need to be aware of the cost of keeping it there.
However, there’s one reason some people choose to hold cash in a stocks and shares ISA, which is flexibility. By using this wrapper, you can retain the option to invest later without losing your ISA allowance.
In truth, ISA limits are use it or lose it, and the ability to shelter up to £20,000 per year from income and capital gains tax is one of the most generous allowances available. That’s why some savers would rather use the stocks and shares ISA to preserve flexibility.
Ultimately, while you can hold cash inside a stocks and shares ISA unless it’s part of a plan to drip-feed into the market, it’s better to opt for a high-paying cash ISA if maximising interest and staying in cash is your goal.
Either way, it’s a reminder that tax wrappers are only half the story – it’s how you use them that counts.
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