Stocks and Shares ISAs

Are Stocks and Shares ISAs a good idea?

If you are contemplating the need to start saving and want the potential for higher returns than you can achieve from a cash deposit account, and if you are comfortable taking a degree of investment risk, then a Stocks and Shares ISA could be for you.

What is the ISA allowance?

The current annual ISA allowance is £20,000 and it is up to you whether you choose to invest this as a lump sum or as a series of smaller payments throughout the tax year.

There is no right or wrong answer, and the way you choose to fund your ISA will probably reflect your personal circumstances.

Not all of us have a capital sum on deposit that we can allocate to an ISA each year but may have a little surplus income each month that can be invested.

Stocks and Shares ISAs vs Cash ISAs

There are pros and cons with each scheme. Investing in a Stocks and Shares ISA requires a level of risk as it involves investing your money in the financial markets, but you could potentially achieve greater returns. Whereas a Cash ISA can offer greater stability and peace of mind with returns being fairly predictable.

Cash ISAs are a perfectly sensible plan if you will require access to cash to cover short-term expenditure or unexpected costs but holding too much cash for a long time can be counter-productive to your long term financial well-being.

As inflation increases (the price of goods and services goes up), it is likely that it will outpace the rate of interest being paid on your cash holdings, meaning the ‘real’ value of your money and overall purchasing power will decrease.

If you are willing to accept some level of risk by investing your money in the financial markets, it is likely that if you remain invested in the market for a significant amount of time, riding the fluctuations in the value of your portfolio and the inevitable ups and downs of the markets, you will potentially achieve greater returns than being invested in cash alone.

Where to invest a Stocks and Shares ISA?

A Stocks and Shares ISA gives you the opportunity to invest your money in a range of different investments including Investment Trusts, Exchange-traded Funds (ETFs), bonds, individual company shares and investment funds.

There are thousands of funds and companies to choose from, which can be quite a daunting prospect, so it is worth doing the research to ensure you are comfortable with any decisions that you make.

Alternatively, seek advice from a reputable firm of financial advisers such as The Private Office which has its own in-house Investment Committee and decades of experience in helping people make sound investment choices.

Who to invest with? 

You will need to decide which ISA provider you would like to save with. Some questions you might like to consider: Do I want to perform investment transactions myself? What are the charges and fees? Do I want a standard ISA account or a Flexible ISA?

Some providers simply give you a platform to make investment decisions yourself and they will conduct the transactions for you.

Alternatively, some providers will select an investment portfolio for you based on your answers to questions that explore how much risk you are willing to accept.

It is important to understand the charges and fees taken by providers, which will include administration charges for using the platform, charges for investing into funds and any transfer charges if you decide to switch investments.

If user experience is important to you, some platforms offer clean, user-friendly interfaces and make the customer experience very fulfilling.

Whilst most types of Stocks and Shares ISA will be standard accounts, some providers offer a Flexible ISA that will allow you to add funds to your ISA, withdraw them and then reinvest them again without using up more of your annual ISA allowance.

For example, if you add £10,000 to an ISA, you will have £10,000 of your allowance remaining.

However, if you need £5,000 and the ISA is a Flexible ISA you can withdraw this from the ISA and still invest up to £15,000 back into the ISA in the same tax year.

You can also withdraw capital you have saved in previous tax years and replace this in your Flexible ISA without losing the valuable tax benefits provided you do this in the same tax year.

Are Stocks and Shares ISAs tax free?

All income and growth within a Stocks and Shares ISA is tax-free and the proceeds are also free of tax when you withdraw capital from your account.

This is particularly attractive when compared to a standard investment account where you will potentially have to pay Income Tax and Capital Gains Tax on your returns.

However, as mentioned earlier, the ultimate value of your ISA will depend on the performance of your investments and you may get less back than you originally invested.

Can you transfer a Stocks and Shares ISA to another provider?

It is very easy to transfer your Stocks and Shares ISA between providers. However, you must ensure you go through the ISA transfer process to retain the tax-free benefits and not close the ISA down and then re-invest the money.

From the start of the 2024/25 tax year, if you want to transfer a Stocks and Shares ISA that has been contributed to in the current tax year, then you can now make full or partial transfers to a new provider.

This is because you are now allowed to contribute to more than one type of Cash or Stocks & Shares ISA in a tax year. 

You can transfer money from cash ISAs across to Stocks and Shares ISAs and any transfer of ISA contributions made in previous years will not count towards your current year’s ISA allowance.

Should your Stocks and Shares ISA provider fail or go into default, you will be covered by the Financial Services Compensation Scheme for up to £85,000.

However, it is important to note that you will not be eligible for this compensation if you make losses on your investment or simply because it has not performed in line with your expectations.

Investing in a Stocks and Shares ISA can be an excellent way to build up tax-free savings if you are looking to invest for a period of 5 years or more and are concerned that inflation may erode the value of your savings.

Stocks and Shares ISAs can also provide a valuable source of tax-free income in retirement to supplement your pensions savings and minimise the amount of income tax you pay in retirement.

However, dipping your toe into the world of investing can be quite a daunting prospect, and if you lack investment experience it is important that you take advice or speak to an adviser before you invest.

Please note that investments can fall as well as rise in value and you may not get back what you have invested.