What Is A Stocks And Shares ISA?
When you invest through an ISA, you do not have to pay capital gains or income tax on money earned from your investments. Though there is a limit to how much ISA profit is tax-free, any increase in value up to that point is sheltered from taxation.
You can only pay into one stocks and shares ISA per tax year, but you can also open a new ISA using a different provider each year, if you want. The lack of taxes is what makes these savings accounts so attractive to the general public, as they act as “tax wrappers” to insulate investment profits.
How Does A Stocks And Shares ISA Work?
It is a misconception to think that you need to be a Wall Street trader to invest in a stocks and shares ISA, as all that is required is that you are a U.K. resident who is above the age of 18. This savings account is a long-term commitment, which means you should be prepared to allow your money to grow, untouched, for at least five years.
Your investment value may rise, but it can also fall, so there is always a risk that you may recoup less than your principal investment. You can choose two approaches when investing in an ISA. You can either choose to invest in funds, or you can do research and buy your own shares.
Fund investment is the easiest way to begin investing in an ISA. Stocks and shares ISA rules allow you to purchase units from ready-made baskets of investments. These funds let you spread your risk and money across different asset classes, such as trusts, shares, and bonds. Choosing a ready-made portfolio is often considered less risky, and this approach is also not as time-consuming.
Buying Your Own Shares
If you do not want to invest in funds, you can do your own research and purchase your own shares. This approach works best for those who have an active interest in learning how to maneuver the markets. After conducting research, you can purchase shares from companies that you believe will do well and make a profit. This approach is often called the “DIY” way to build a portfolio.
How To Open A Stocks And Shares ISA
Now that we have addressed the question of what is a stocks and shares ISA, we can discuss how to open such an account. There are several different institutions/providers from which you can buy an ISA, including:
- An ISA provider
- A fund manager
- A bank, fund supermarket, or discount broker
- A financial adviser or planner
- An online share account
- A stockbroker
There are three main steps to opening a stocks and shares ISA:
Step 1: Determining How Much To Invest
Before opening an ISA, you will first decide how much money you are willing to invest. You can choose to split your investment between a stocks and shares ISA, innovative finance account, and a cash ISA. Your objective, when making your investment into a stocks and shares ISA, should be to receive an inflation-free profit.
Step 2: Choosing A Broker
If you decide to go with a brokerage, you will need to choose an institution with which to invest funds. You can see our recommendations in the sections below. The best stocks and shares ISA brokers are those that keep your costs and fees low, especially if you have a smaller portfolio.
Many brokers will also help you determine your risk profile, an important component of this process. An online risk questionnaire can help you assess your goals and determine objectives and relative risks.
The ISA provider will require your address, date of birth, contact information, proof of address, identification, and other personal documents to set up your account. Once your details are verified, your account will be active, though there is no pressure to invest immediately.
Step 3: Choose Your Investments
There are two approaches to a stocks and shares ISA. You can purchase funds or select your own shares. You might prefer to make a lump-sum contribution to your ISA, or, conversely, you might choose to make individual payments. Your investment strategy depends on your risk profile and financial situation.
What Is The Best-Performing Stocks And Shares ISA?
In this section, we will discuss the stocks and shares ISAs that have performed well during the 2022-2023 fiscal year. There are three institutions that have set themselves apart from the rest, in terms of performance: FinecoBank, InvestEngine, and Interactive Investor. Below is a brief summary of each.
PLACEMENT_8is one of the largest banks in Europe, and it has more than twenty years of experience in the industry. It offers both ready-made funds and do-it-yourself accounts. With this bank, you have access to twenty-six global markets, as well as the ability to trade more than twenty-thousand ETFs, shares, funds, bonds, and CFDs.
Like FinecoBank, InvestEngine also offers funds and share-choice accounts. Based in the United Kingdom, this low-cost broker lets you invest in more than 500 ETFs from Vanguard, iShares, and other top brands. InvestEngine scales its accounts—you can choose from a beginner investment account or one that is more advanced. With the latter, you build your own portfolio and incur no platform fees. Regardless, all portfolios are free from dealing, setup, withdrawal, and ISA fees.
Currently, Interactive Investor is the second-largest platform of its kind in the United Kingdom. It is known for its fixed charges, preferring that cost-effective method to charging percentage-based fees. Interactive has been in the industry since 1995, and it gives its account holders access to 40,000 investment assets, including ETFs, investment trusts, funds, and shares. You can also access seventeen global exchanges across Asian, European, and North American markets. Interactive Investor offers both ready-made and “DIY” stocks and shares ISAs.
Are Stocks And Shares ISAs Worth It?
Stocks and shares ISAs are “worth it” for those who have mid- or long-term savings goals they want to accomplish. These accounts are tax efficient, and, if allow your money to grow in an ISA for five or more years without withdrawing it, you will likely see positive results.
That said, there are some disadvantages. The value of your ISA can rise and fall, meaning you could potentially lose money. Investors who are concerned about market volatility might be wary of investing in this type of account. Additionally, though the best brokers will keep fees low, there will likely be at least some monetary costs of holding an ISA with a company. Take into account your risk profile, financial situation, goals, and preferences when deciding whether a stocks and shares ISA is worth it.
Are Stocks And Shares ISAs Safe?
While your savings are not protected from the volatility of the market, when you choose a stocks and shares ISA broker, you are picking a financial institution that abides by governmental regulation. The United Kingdom’s Financial Conduct Authority is responsible for overseeing these accounts and their companies and brokerages in the U.K. In October of 2022, the FCA held a meeting to consult on these investment ISAs, updating advice regulations and holistically reviewing them across the country.
Stocks And Shares ISA Limit & Allowance
You can open an investment savings account at any point during the tax year, and, every tax year, there is a limited amount you can put into your ISA. This “ISA allowance” is £20,000 for the 2022-2023 tax year, according to stocks and shares ISA rules. Should you exceed this limit, you could incur tax on your investment. The tax year goes from 6 April to 5 April, with the deadline hitting at midnight on the 5th.
There are a few different ISA fees and charges that you could incur while setting up and maintaining your account. These include:
- Fund Management Charge (FMC). When you invest in a fund (rather than select a DIY portfolio option), fund managers often charge for actively tending to and looking after your investments. This charge is also sometimes called an annual management fee.
- Buying/Selling Charges. When share dealing, it is not uncommon to pay a flat fee or percentage whenever you buy or sell stock shares on a platform. This fee is often referred to as a trading fee.
- Transfer-Out Fee. If you move your ISA to a different provider, you could incur a transfer charge.
Below is a comparison of the fees from the top U.K. platforms, FinecoBank, InvestEngine, and Interactive Investor.
|FinecoBank||0.25% on the total value of your funds in the portfolio||£0||0.20% of the transferred (minimum of £0.73 and a maximum of £2.54)|
|InvestEngine||0.25% on the total value of your funds in the portfolio (Manage Portfolio), 0% for a DIY Portfolio||£0||£0|
|Interactive||£0.75 for every £100 you have invested||First trade is free, after that, trades cost £5.99||£0|
The U.K. government has detailed an extensive list of rules for stocks and shares ISAs. According to the U.K. government website, you can include four things in your stocks and shares ISA: shares in companies, corporate bonds, government bonds, and unit trusts and investment funds. You are unable to transfer non-ISA shares you own into your ISA unless these shares come from an employee share scheme.
Other important stocks and shares ISA rules to note include:
- You can take money from your ISA without losing tax benefits.
- If you move abroad, you cannot put money into your ISA the tax year after you move, unless you are a Crown employee or a spouse or civil partner of a Crown employee.
- You must tell your ISA provider if you are no longer a U.K. resident.
- You can still keep your ISA open if you move, and you can still receive tax relief on the account.
- Your ISA ends when you close it. It can also end when your executor closes it or your estate administration is complete, should you pass on while your ISA is open. If need be, your stocks and shares ISA provider will close your account three years and one day after your death.
Another important rule to note, as discussed in the next section, is the U.K.’s prohibition on paying into more than one stocks and shares ISA.
What Happens If I Pay Into Two Stocks and Shares ISAs?
You can have more than one stock and shares ISA, but you can only open one account per year. Additionally, you can only pay into one ISA each year. You must wait until the next tax year to deposit money into another stocks and shares ISA, and, at the end of the tax year (5 April at midnight), your ISA allowance expires. Any allowance that has been left unused will be lost; it will not “roll over.”
Do You Pay Tax On An ISA?
An ISA is free of taxes from interest on cash, income, or capital gains. That is the main feature that makes this investment account so attractive to investors. Even if you make a profit on your ISA, you are shielded from taxation on up to £20,000.
Do Stocks And Shares ISAs Pay Dividends?
Stocks and shares ISAs do pay dividends, assuming your funds or companies are showing growth. These dividends are tax free. If you prefer, you can hold a monthly income ISA, which will pay out monthly income or dividend payments. You do not have to declare these payments on your income tax return, nor do you have to add them to your existing earned income.
What Is The Average Stocks And Shares ISA Return?
According to The Motley Fool, the average return on a stocks and shares ISA for the 2020-2021 fiscal tax year was 13.55%. Though the market is volatile, depending on your investments and the state of the domestic and global economy, you could see returns that earn you untaxed profits.
Cash ISA Versus Stocks And Shares ISA
A cash individual savings account is an account that pays interest that is free of income tax. These accounts are good options for those who have inheritance or long-term savings goals or want to reduce risk. A stocks and shares ISA, by contrast, is riskier than a cash ISA, but it can yield larger returns. You can have both a cash and stocks and shares ISA at the same time and pay into both, so long as your total contributions do not exceed £20,000 per year.
Lifetime ISA Versus Stocks And Shares ISA
A lifetime individual savings account allows the holder to save up to £4,000 each tax year, either towards your first home or towards retirement. You must be between the ages of 18 and 39 to open this account, and you can add the maximum amount until you are 50 (though you must make your first contribution before the age of 40). On top of your savings, the U.K. government adds a cash bonus of £1,000 per year.
When compared to the stocks and shares ISA, the lifetime ISA is less risky. It has more age restrictions, but those who do not want to incur the ups and downs of the market will appreciate this type of account.
How Long Should You Keep An ISA?
It is recommended that you invest your money in a stocks and shares ISA for at least five years, in order to accrue as much profit as possible. This investment vehicle is best for those who can put money into the account and leave it untouched. Staying invested for a longer period of time allows your money to both grow steadily and weather any market volatility.
Can You Transfer A Cash ISA To A Stocks And Shares ISA?
You are able to transfer money from a cash ISA into a stocks and shares ISA and vice versa. If you transfer an ISA (into which you have paid during the current tax year) from your current provider to a new one, you must transfer the entire balance, not just part of it.
Can You Withdraw Money From A Stocks And Shares ISA?
Most stocks and shares ISAs are very flexible, and you can withdraw money from them at any time. But, if you withdraw your money during the tax year and then reinvest it during that same tax year, that will count towards your total ISA allowance.
This guide has discussed the basics of stocks and shares ISAs and their tax efficiency and benefits. Though these types of ISAs incur more risks than others, they can still be a great investment vehicle for those looking to earn passive income over time.