An ISA is an individual savings account which is exempt from tax. Because of this, ISAs can deliver more reliable long-term growth than ordinary investments as the interest isn’t taxed.
This does mean however that there is a cap on the yearly savings you can enter into these accounts. This is called your ISA allowance and is capped at £20,000.
A stocks and shares ISA differs from a cash ISA as it’s a tax-efficient investment account where you put money into range of different investments. These include investment funds, investment trusts, individual shares, bonds and gilts.
How Do Stocks & Shares ISAs Work?
To be eligible for a stocks and shares ISA, you must be:
- A UK resident for tax purposes.
- Aged 18 or over.
When you set up your stocks & shares ISA, you’ll be able to choose which type of investments to put your money towards. This is a very important decision as it will affect both the risk and potential growth of your ISA.
Before deciding which stocks and shares ISA is right for you it’s best to seek financial advice so that you can make a fully informed decision. Make sure to thoroughly go over the documents from your ISA provider so you understand which assets your money will be invested in.
When you invest in your ISA, you’ll purchase units which are your share of whichever assets your ISA is linked to. These can fluctuate in price so it’s important to remember that you could lose money as well as make it.
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Pros and Cons of a Stocks and Shares ISA
Like all kinds of investments, stocks and shares ISAa come with benefits and drawbacks. Consider the below when deciding if it’s the right avenue for you:
Pros
There are quite a few benefits of a stocks and shares ISA, besides the obvious tax benefits. These include:
- It’s an easy way to start investing – Opening a stocks and shares ISA is a great way to start your investing journey. You can leave your money to work tax-efficiently while your chosen ISA provider does all the work.
- It can deliver higher returns – As inflation is greater than the Bank of England base rate, your savings in your regular savings account is most likely decreasing in value. With an ISA, while there is a risk you could get back less than your initially investment, there’s also a chance for inflation-beating returns in the long run.
- It can be ethical – When you choose what assets to invest your money in you can specifically choose green companies so that your money has a positive impact on the environment.
- It’s transferrable – One key benefit of holding a Stocks and Shares ISA is that you can move it from one provider to another. So, if you’re disappointed with the provider you initially chose or you feel the fees are too high, you can simply transfer your stocks and shares ISA to a new provider.
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Cons
Like all forms of investing there is the risk that you could lose money with your stocks and shares ISA. The level of risk will depend on the ISA you choose, what investments you hold, how long you hold them for, and how stock markets perform over that time.
Unlike an ordinary bank account ISAs come with certain fees. Depending on which stocks and shares ISA you choose, you may have to pay:
- Platform fees – Some platforms may charge you a flat fee, while others will base it on a percentage of the value of your funds.
- Annual management fee – This fee is the charge for an investment firm to look after your ISA.
- Underlying fund fee – These are the charges to invest in the actual funds.
- Transferring investments – Some providers may charge an exit fee if you want to transfer your investments to a competitor’s firm or platform.
- Account closure fee – Some platforms will charge you for closing down your account completely.
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Choosing the Best Stocks & Shares ISA Provider
There are many factors to consider when choosing your ISA provider. So, it’s vital you do your own research before choosing. Make sure you’re considering the following factors:
- Which funds you can access.
- The number of funds.
- The annual platform charges and fees.
Another often overlooked factor to consider is how easy your chosen platform is to use. If you’re planning to be regularly trading rather than holding long term, you’ll want your ISA provider to have an accessible app to make this easier.
Contrastingly, if you’re planning to leave your money untouched and passively invest instead, a platform that automatically reinvests dividends will be better suited to you. This way you’ll receive greater returns on your investments.
If you know what kind of ISA you want a comparison website can make it easier for you to decide which option to go for.
But if you’re still not sure which ISA is best suited for you it could be time to contact an independent financial advisor for impartial advice. They’ll be able to cater your investments to you and manage your portfolio on your behalf, which can be daunting for first time investors.
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