Provided you’re comfortable accepting the risks involved, a stocks and shares ISA has the potential to provide you with tax-free returns that over the long term may beat those offered by cash ISAs.
There are no guarantees, however, and you’ll need to be prepared to tie up your money for the long-term to give your investment the best chance of riding out any stock market volatility.
Here, we explore some of the alternatives to stocks and shares ISAs to help you decide on the best way forward for your funds.
Money market funds
A money market fund is a low-risk investment that invests in short-term securities, such as cash deposits and company and government bonds that are due to mature in the next few months. They are particularly appealing to investors who want a safe investment that can weather periods of economic turmoil.
Money market funds can even be held within a stocks and shares ISA, so if you like the tax benefits that a stocks and shares ISA provides, but would prefer a lower risk investment with quick returns, this could be a good compromise.
Read more about how they work in our article What is a money market fund?
Good if you: Want a relatively low-risk investment that won’t take long to produce returns, or if you want to put your ISA allowance into stocks and shares, but haven’t yet decided where you want to invest over the long-term.
General investment account
If you are keen to invest in stocks and shares but have used up your £20,000 ISA allowance for the tax year – or there is a reason you would prefer to invest outside of an ISA – then you can use a general investment account (GIA) instead.
These accounts let you hold investments outside of tax wrappers such as ISAs and SIPPs. So, while you do not get the tax benefits that these products provide (meaning you will have to pay income tax on any returns you make from a GIA and capital gains tax on any investments you sell), there is also no limit on the amount you can invest.
Good if you: Want to invest in stocks and shares, but have already put £20,000 into an ISA or ISAs this tax year.
Cash ISAs
A cash ISA boasts the same tax benefits as a stocks and shares ISA, but is a much lower risk option as it works more like a traditional savings account. Your money won’t be invested in stocks and shares, but it can still generate interest like in a regular savings account.
You can opt for a fixed rate cash ISA, where you lock up your money for a set amount of time (usually between one and five years) and let it generate interest untouched. Fixed rate cash ISAs benefit from higher interest rates, but you’ll be charged a penalty if you want to get your money out. Variable rate cash ISAs offer slightly lower interest rates in exchange for the ability to access your money any time.
You can read about the best cash ISAs currently on the market in our article Best cash ISA rates – which cash ISAs pay the most interest?
Good if you: want to benefit from the tax exemptions of an ISA, but are risk-averse and prefer a traditional savings account structure.
Innovative Finance ISAs
Another kind of ISA you might consider is an Innovative Finance ISA, or IFISA. Rather than holding your money in either cash or investments, in an IFISA your money is held in a range of peer-to-peer loans, typically spread over hundreds of individuals and businesses.
Note that you won’t be a shareholder in any of these businesses, but you will hopefully benefit from interest as the individual or company pays their loan off.
IFISAs are among the riskier alternatives to a stocks and shares ISA, as borrowers may default on their loans, meaning you will not get your money and interest back. The protections provided by the Financial Services Compensation Scheme (FSCS) do not apply here, so your money will only be protected if your ISA provider has its own protections in place.
They are also much harder to withdraw money from, as this requires selling your loans to someone who is willing to take them on, and this can be a fairly limited market.
You can read more about IFISAs in our article What is an innovative finance ISA?
Good if you: prefer a peer-to-peer lending structure to stocks and shares, and are comfortable with the associated risks.
Self-Invested Personal Pensions (SIPPs)
A Self-Invested Personal Pension (SIPP) is a type of pension that allows you to choose where your money is invested. In a typical pension, you may be given a broad choice of funds to choose from but otherwise have little control over the individual investments themselves. In a SIPP, you can choose individual companies to invest in, making it an attractive option for experienced investors.
Pensions also come with the benefit of pension tax relief, effectively meaning the government will chip into your SIPP whenever you make a contribution, up to certain limits. Read about how this works in our article How pension tax relief works.
Like an ISA, there is an Annual Allowance on SIPPs, limiting the amount you can contribute per tax year. However, this is much higher than that of an ISA, currently sitting at £60,000 in the 2023/24 tax year. Bear in mind however, that unlike ISAs you won’t be able to access your pension savings until you reach the age of 55 (rising to 57 by 2028).
Learn more about SIPPs and whether they might be the right choice for you in our article Everything you need to know about SIPPs.
Good if you: want to save up for retirement while making your own investment choices and benefiting from a higher allowance than an ISA offers.
Fixed rate bonds
Fixed rate savings bonds are similar to fixed rate cash ISAs, in that you are basically agreeing to lock away your money for at least one year and up to five, in exchange for competitive interest rates.
While fixed rate bonds do not provide the tax benefits of an ISA, you are also not beholden to an annual allowance, meaning the account limit is set by the provider and will usually be much higher. They can therefore be a good option if you’ve already used your ISA allowance, and aren’t comfortable taking risks with your money.
Read more about how fixed rate bonds work and some of the current best buys in our article Fixed rate savings bonds explained
Good if you: are comfortable locking away your money for a year or more in return for potentially higher returns than easy access accounts can provide.
Should I get a stocks and shares ISA or something else?
Ultimately, the funds or accounts that you choose to save or invest in should depend on your own personal circumstances, including your current financial situation, your attitude to risk, and your financial goals for the future.
However, bear in mind that these options are not mutually exclusive, and you can mix and match if you have the funds to do so. For instance, you could put some money into a stocks and shares ISA for the chance of higher returns, and then put the rest into a lower risk cash ISA or money market fund.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.
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