SHOULD I HOLD MY CASH IN A STOCKS AND SHARES ISA – OR IS A CASH ISA BETTER?

In our weekly series, readers can email any question about their finances, to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot Financial Planning and has worked in financial services for 25 years. If you have a question for her, email us at [email protected]

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?

Answer: With rumours swirling that Labour could reduce the annual cash ISA limit or combine the stocks and shares and cash ISA into one, it’s understandable that savers are rethinking where to hold their money.

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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?

The short answer is yes, you can hold cash in a stocks and shares ISA but whether you should depends on your intentions. The UK has a love affair with cash that does need addressing.

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.

That said, you can hold cash within a stocks and shares ISA but unlike a cash ISA, where your money earns interest from the outset, cash held in a stocks and shares ISA typically earns little or no return unless you actively choose to invest it in a money market fund or short-term bond fund.

Without doing so, your cash may simply sit in a low or no-interest holding account.

Money market funds are a type of low-risk investment that typically invest in short-term government or corporate debt. They aim to provide a modest return that tracks prevailing interest rates, and while they are not entirely risk-free, they are considered a relatively safe place to park cash within an investment 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.

At the time of writing, some easy-access cash ISAs are paying upwards of 4 per cent, with fixed-term options even higher. Unless your stocks and shares ISA platform gives you access to a good money market fund, you might be better off using a dedicated cash ISA for cash holdings.

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.

This could be useful if, for example, you’re expecting markets to fall and want to drip-feed investments when you feel more confident. But it’s a tactical play, not a strategy for the long haul. And remember trying to time the markets is often a fool’s errand.

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.

With a formal consultation on ISA reform expected this summer, there is renewed focus on how tax-free savings products are used. If the cash ISA limit is reduced – as has been speculated – stocks and shares ISAs may become even more valuable as a broader tax shelter. But until any firm policy emerges, it’s best not to make decisions based on speculation alone.

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.

As always, think about what the money is for and when you’ll need it. If the answer is “soon”, then a cash ISA or savings account may serve you better. If it’s longer-term money you just haven’t got around to investing yet, then using the stocks and shares ISA as a staging post could still make sense.

Either way, it’s a reminder that tax wrappers are only half the story – it’s how you use them that counts.

2025-06-05T04:55:36Z