ISAs have long been touted as a good tax-free investment, but for many investors the low returns make ISAs a poor choice for where to place your money. When comparing gold vs ISAs, gold has outperformed them consistently, and is a great way to diversify your portfolio, making it a much better option for investment.
What is an ISA?
An Individual Savings Account is considered a ‘wrapper’ account, that shields your savings and investments against certain types of taxation.
Every UK resident has an ISA allowance for each tax year – starting on April 6th – and this is the maximum amount you are allowed to place in any ISA for the next 12 months. Some ISAs are fixed-term and can be opened for as little as a year, while others are continual until you close the account.
Types of ISA
There are a range of ISAs that investors and savers can choose from, each offering differing levels of returns, with different stipulations attached:
- Cash ISA (Instant Access, Fixed-rate, Regular savings)
- Stocks & Shares ISA (Funds, Gilts, Shares)
- Help-to-Buy ISA (First-time buyers)
- Innovative Finance ISA (Peer to peer)
- Lifetime ISA (First-time buyers or retirement plans)
- Junior ISA (Under-18's)
The most common choice is the Cash ISA. This is a basic account that protects savings against income tax. Cash ISAs are offered by most banks and building societies, offering a choice between flexibility in withdrawing/depositing funds, or a fixed-rate; where you get a guaranteed rate of interest, but limited access to the account.
Cash ISAs are the choice for 90% of investors, but the next most popular is the Stocks & Shares ISA. These can be further broken down into three parts: Funds, Gilts, and Shares. The latter of these are as expected – the money you invest is used as a unit of part-ownership in a company, and money is made based on the company’s performance – but the other options are a bit more complex.
Funds (Active or Passive) are based on stock market investments. Active Funds are operated by a fund manager, who makes investment decisions, and takes a fee for their work. Passive Funds have no manager, and are usually backed by derivatives; there’s less direction, but lower fees.
The final option, Gilts, are government bonds that are issued by the UK Treasury. A nominal bond that promises to pay a fixed coupon rate every six months, along with a ‘principal’ upon maturity. This makes them relatively low risk, but timing is key – if demand is low you will be offered a good rate, but high demand means your yield will be poor; as the Treasury know they can sell while promising less yield.
ISA Benefits
ISAs are a popular investment choice because they are low risk. Your money is placed into an account with a bank or building society, and zero tax is paid on the interest your money makes, unlike some other savings accounts. Although limited amounts can be placed in ISAs during each year, over time this can be built to substantial amounts.
There are also financial protections in place, backed by the government. The Additional Permitted Subscription means that if your spouse or civil partner dies, you can inherit their ISA on top of your own. The other safeguard is that ISAs are covered by the Financial Services Compensation Scheme (FSCS). This protects your savings up to £85,000 per financial provider.
Specific ISAs have specific benefits, but usually come with restrictions. Some Cash ISAs for example, are flexible so that you can withdraw funds, and then pay back in; as long as the balance matches up within the financial year, no penalties are applied to your earnings. Others can limit the amount you can withdraw, or require a long noticed period, making them a less desirable choice if you need short term access to your money.
ISA Allowance
The current UK ISA annual allowance – for the financial year 2023/24 – is set at £20,000 for ISAs, and £9,000 for the Junior ISA accounts. These are the maximum amounts you can put in, and you can only open one type of ISA each financial year.
The ISA allowances are also cumulative: your £20,000 limit applies across any and all ISAs you have opened in that year. If you were to place £15,000 into a Cash ISA, you could only place a further £5,000 into any other ISA.
Smart Investment
The fixed-rate nature of ISAs means that returns often end up being far below many other investment vehicles. In terms of risk versus reward, they are low on both accounts. To make matters worse for ISAs, high inflation has eroded the value of any interest earned, with most ISA holders losing money. Conversely, the political uncertainty and economic volatility has seen gold’s demand increase over the past few years, along with its subsequent value.
The graph below shows the performance of a £10,000 investment between 2013 and 2023 for both gold and a Cash ISA (ISA rates increasing from 2021 onwards). The chart clearly shows the far superior gains made by gold in the past decade – significantly outperforming the ISA in just ten years.
Gold's performance compared to a Cash ISA between 2013 and 2023
Even ignoring the potential higher returns that gold offers, it is also a safe-haven asset, and tends to correlate negatively with inflation and interest rates. It is a great way to diversify your portfolio, and is independent of the control and fluctuations of the normal banking system.
Gold also offers a greater flexibility than ISAs too. Ownership of physical gold puts all the control in your hands. If you want to buy more you can; unlike ISAs there are no limits or annual caps, you can buy something as small as a 1 gram gold bar, or several 1 kilo bars. Equally as important, when you decide you want to sell there are no restrictions or punishments for doing so. GOLD.co.uk offer some of the UK’s best market rates for buying back gold, and the process is simple, quick, and discreet.
