There are two main types of ISA some in the UK. The most popular type is the cash ISA the second most popular is the stocks and shares ISA. Whilst in recent years there have been other types of become available such as the junior ISA the help to buy ISA and the lifetime ISA for the purposes of this article I want to focus on the two main types.
You should consider the cash ISA in the same way as you consider other cash savings accounts in the short term these are ideal as your money is guaranteed however in the long term due to the low interest rates offered by banks and building societies in the UK , inflation will erode the value of the savings.
A stocks and shares ISA on the other hand benefits from being invested so if you are looking to build funds for five years or more in the future these may be a better option. As the investments will hopefully grow above the rate of inflation over that period.
Many people think that for a stocks and shares ISA you have to invest it into one or two companies. This isn’t true and it can be invested in a diverse portfolio of investments and companies in a similar way to pensions.
Both the cash ISA and the stocks and shares ISA benefit from the £20,000 annual allowance and if you have both types the allowance, this is shared between the two. The great advantage of the ISA is that any money that you get from the ISA in the future is free of tax. The other advantage is you can take out at any point (subject to restrictions based on individual products)￼￼￼￼￼.
Often it makes sense to have both a cash ISA and a stocks and shares ISA so you can divert the funds between the two as in how you see fit and how your needs develop.￼