An investment ISA is a tax-free way of investing your savings in the stock market. Unlike a cash ISA, there is no guarantee your money will earn interest and your money is at risk: if the stock market goes up, you can earn a lot; if they go down, you could lose a lot. You cannot lose more money than you put in.
Many investment ISAs lost value last year because stock markets were unstable. Now that the markets have stabilised, many investment ISAs are showing significant gains again.
When choosing an investment ISA, look at how your money will be invested. Some investment ISA providers give you almost full control while others decide how to invest your money for you.
You can put up to £20,000 per year into an ISA without ever paying tax on any interest you earn. If you put money into an ISA every year, you could eventually earn a lot of tax-free income every year.
Investment ISAs are not for the faint hearted as they carry a fair amount of risk.
The main benefit of this kind of ISA over a cash ISA is you could earn more interest. The current average interest on cash ISAs is between 1 and 2%. In previous years, some investment ISAs have gained more than 10% in a year.
The downside is that your investment can go down in value. For example, you put £10,000 in an investment ISA today but it might only be worth £9,000 next year. The year after, it could go back up to £10,500. Then again, it might not.
To get the most out of an investment ISA, you may need to lock away your money for more than a year. If you need to access your savings at short notice, or if you can’t afford to lose your investment, then you should consider stashing your savings somewhere safer.
For more information, read our in-depth stocks and shares ISA guide.