Time to review your ISA options?

Recent UK government discussions around Individual Savings Account (ISA) rules have raised questions over how much savers should be able to hold in cash compared with investments. Whilst no changes have yet been made to the annual Cash ISA limit, the debate raises an important point: is your money working as hard as it could?

Cash ISAs are very low-risk and offer predictable returns. But with inflation often overtaking the interest rates on Cash ISAs, the real purchasing power of your money could be shrinking over time. That’s why now could be the right time to review your ISA options.

Why look beyond cash?

A Stocks and Shares ISA allows you to invest your money in the stockmarket, giving it the potential to grow more than it would sitting in cash. Your earnings aren’t capped, which offers the potential for greater rewards and reaching your financial goals faster. Crucially, it can help your savings keep up with – or even beat – inflation, especially over the long term.

Although, it’s important to remember that investing typically comes with more risk than cash.

Like Cash ISAs, Stocks and Shares ISAs are tax-efficient. This means you won’t pay capital gains tax or income tax on any gains you make or dividends you receive.

With a Stocks and Shares ISA, you can also spread your money across a blend of asset classes such as equities (shares) and fixed-income (bonds). This is known as portfolio diversification. Different asset classes are likely to perform well at different times and in different market conditions, investing in a good mix means you won’t have ‘all your eggs in one basket’ and could result in better returns over the long term.

ISA tax rules may change in the future. ISA tax advantages depend on your individual circumstances.

Not all investing is high risk

A common misconception of investing in the stockmarket is that you must take on high levels of risk to see returns. In reality, many providers offer lower-risk (but not risk free) portfolios designed to preserve capital whilst still giving your money the opportunity to grow. These types of portfolios are often weighted towards government bonds and diversified funds, with less exposure to high-volatility shares.

To help investors understand risk, providers use the Synthetic Risk and Reward Indicator (SRRI) which rates funds and corresponding share classes on a scale of 1 to 7 based on past performance. A fund with an SRRI of 1 will provide the lowest risk (though not completely risk free) but potentially low returns, whereas a fund with an SRRI of 7 is deemed the highest risk but carries the potential for high returns. This can help you choose investments that match the level of risk you’re comfortable with.

The SRRI is a key component of a fund’s Key Investor Information Document (KIID). For M&G funds, the KIID is available on each fund’s page within our Fund Centre. You can also get a quick view of the SRRI under the ‘Key Facts’ section of each fund page.

Please note the SRRI is based on historical data and may not be a reliable indication of the future risk profile of any given fund and share class.

It’s also worth stating that investing in a Stocks and Shares ISA doesn’t have to mean going ‘all in’ on the stockmarket. Many investors choose a blended approach, keeping some money in cash for short-term needs whilst putting a portion into investments for long-term growth.

What to consider

When reviewing your options, you should think about when you’ll need access to the money. If you’re likely to need it within the next year or two, to pay for a house deposit or a wedding for example, a Cash ISA may still be more suitable. Stocks and Shares ISAs are generally better suited for investments you can leave untouched for at least five years, giving enough time to smooth out short-term market ups and downs.

It’s also worth reviewing costs. Stocks and Shares ISAs often come with fund management fees and platform charges which can affect your returns. Make sure you understand these costs and weigh them against the potential benefits.

If you are unsure whether a Stocks and Shares ISA is right for your individual needs, speak to a financial adviser.

Transferring Cash ISAs

You can transfer all or part of the savings you’ve built up over previous tax years in a Cash ISA to a Stocks and Shares ISA without affecting its tax status or impacting your ISA allowance for that year. You can choose to stay with your current provider (if they offer a Stocks and Shares ISA) or move to a new one. Visit our Transfer your ISA page for more information.

Please note The M&G ISA is a Stocks and Shares ISA only.

Your current provider may apply a charge when you transfer your investment. Please remember that whilst your investment is being transferred it will be out of the market for a short period of time and will not lose or gain in value.