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ISA vs Savings Account – What’s the Difference and What is Best for You?

When we think about our financial planning, having enough money to survive from day to day is the least of our expectations. So, how do we then factor in bigger aspirations or the ability to cope when emergencies arise? What about when the source of income dries up? This is why people need to save.

ISA vs Savings Account: Summary Table

❓ What does ISA stand for?Individual Savings Account
✅ The difference between an ISA and a savings account?The difference is that the interests earned in an ISA are tax-free
🔥 Which is better, an ISA or a savings account?It depends on your financial goals and risk tolerance
🙋‍♀️️ Is a savings account better for long-term goals?A savings account is better for a short-term goal

Given that saving is such a key part of everyone’s financial lives, the laws of supply and demand have kicked in. The result is that today there are many different ways of saving, so let’s explore the range of savings accounts on the market to see which might be best for you.


Various types of savings accounts

There are dozens of different savings products here in the UK, and they stem from these five basics.

  • The Easy Access Savings Account
  • The Notice Account
  • The Regular Savings Account
  • The Individuals Savings Account (ISA)
  • The Fixed-Rate Bond

Pretty much all saving is a positive financial step, but there are some important differences between the various types of savings accounts. This blog will focus on the Stocks and Shares ISA vs savings account option.

What is a savings account?

A savings account is a vehicle offered by banks and other financial institutions in which people can deposit money to earn interest. The rate of interest is currently very low, around 0.5%. But the main attraction with this sort of account is that it allows the saver immediate access to their savings without any prior notice. 

You can also get fixed-rate savings accounts that offer up to around 1.45% interest. However, the drawback with this sort of account is that the word “fixed” relates to a fixed term. In other words, you will not be able to gain access to your money for a fixed duration – the shorter the duration, the lower the interest rate.

A 12-month fixed rate would typically offer an interest rate of 0.75%, whereas a five-year fixed rate might offer up to 1.45% interest. But, if you pay tax at the basic rate, you will owe the taxman if your account earns more than £1,000 per annum, and if you are a higher rate taxpayer, the threshold comes down to £500.

The current rate of inflation at the time of writing this blog has gone above 2%. It means that in real terms, money held in savings accounts is losing value.

The best savings account to keep your money is in an ISA.

What is an ISA?

The initials “ISA” stand for Individual Savings Account. There are five different types. 

  • Cash ISA
  • Innovative Finance ISA
  • Junior ISA
  • Lifetime ISA
  • Stock and Shares ISA savings account

The types of ISAs are geared towards people’s financial circumstances, their goals, and their attitude to risk.

What is the difference between ISAs and savings accounts?

The important difference between the ISA and savings account option is that, with the former, your money and your returns are kept within a tax-free wrapper. This means that your investments in an ISA are free of income tax, capital gains tax and dividend tax. The only restriction is your ISA allowance, which is currently set at £20,000 per annum. This means you can deposit up to this amount every year tax-free.

ISA or savings account – Which is Best for Me?

The interest rates that Cash ISAs tend to make are pretty much the same as the interest you would get in an ordinary savings account. So, it’s the best savings account for some people, as it’s a level choice, particularly if they’re only saving in the short-term. 

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But when it comes to long-term savings, where the interest is likely to rise above £1,000 per annum after several years, with an ordinary savings account you will start paying tax on anything above that threshold. But with an ISA savings account, the interest carries on being tax-free. In this case, the answer to whether an ISA or savings account is more beneficial has to be the ISA.

The best ISA or savings account scenario

The best ISA savings account from the point of view of the interest it can earn is the Stocks and Shares or Investment ISA. They are one and the same thing.

You’ve read how poorly the savings account vs ISA performs concerning interest. A Stocks and Shares ISA offers much higher potential returns. Using figures published on the moneyfacts, in the tax year 2017/2018, Investment ISAs showed a return of 4.8%, and in the following year, they showed a return of 4.04%. Over the same period, Cash ISAs returned only 1.01%.

The Stocks and Shares ISA savings account – the risk factor

There is a saying that you have to speculate to accumulate, and this is something that very much comes into play when considering taking out a Stocks and Shares ISA.

Financial markets have a reputation for being volatile, something which is clearly in many people’s minds following the COVID-19 crisis. 

However, historically, financial markets have always recovered. It may take them several years to do so, and this is one of the main reasons that when contemplating opening a Stocks and Shares ISA – you need to be investing for the long-term. 

Putting your savings into an Investment ISA (Stocks and Shares ISA) can produce spectacular results over the long term. It is compound interest coming into play. Basically, the interest your fund makes in one year increases the fund’s value, and it is the new total value against which the interest accrues. 

However, it has to be understood that with this type of investment, your fund can shrink as well as grow, and that is the risk.

Concluding thoughts on the Stocks and Shares ISA v savings account debate

When considering the Savings Accounts vs ISA decision, it all boils down to two things. Are you looking for long-term investment? And how risk-averse are you? The two are inextricably bound. 

The longer you are able to leave your investment where it is, the better. It could drastically reduce the risk of being forced to take out your savings at a time when the stocks and shares market has dropped. 

The other thing it depends on is how you build your stocks and shares portfolio. There are high, medium and low-risk options. Which one to take is dependent on your attitude to risk and your knowledge of the markets. You can again benefit from the help of a professional financial adviser or take advantage of the Robo-advisor platforms that are now around. The choice is yours.


Which is better, a savings account or an ISA?

Your choice will depend on several factors such as your investor profile, financial goals, age, etc. If you are looking to save small amounts of money for the short term and need easy access to cash, then a savings account is ideal. However, ISAs are better for long-term financial goals such as retirement or saving to buy a house.

What are the advantages of an ISA over a regular savings account?

ISAs are tax-free. No income or capital gains tax is imposed on returns in the ISA, while the returns on a savings account are liable to income tax. ISAs are flexible and offer a wide range of investment opportunities, making them earn better interests than a regular savings account. In addition, your spouse may be able to inherit your ISA tax-free.

What are the disadvantages of an ISA?

Tax-free contributions towards an ISA are limited. The ISA allowance for the 2022/2023 tax year is £20,000, and any used allowance is not carried forward. Investments held in an ISA can lose value due to stock market volatility, and ISAs might not be suitable for short-term investments. You can only open one ISA per tax year, and you can’t withdraw money from all types of ISAs

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