Stocks and Shares ISAs are a way of investing in the stock market without paying any tax on gains or income, above the current tax-free thresholds.
The maximum you can contribute to an ISA in a year is £20,000. A Stocks and Shares ISA can make up some, or all, of your ISA portfolio, alongside or instead of Cash ISAs, Innovative Finance ISAs, Help to Buy ISAs (for first-time buyers only) and Lifetime ISAs (for under 40s, to either buy a house or supplement their retirement savings).
Why invest in a Stocks and Shares ISA?
If you are planning to invest for the long term – 10 years or more – then gains from investing can outweigh the returns you would get from saving in a Cash ISA or deposit account.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, an investment platform, says: “If you are putting money aside for the long term of ten years or more, your money has a far better chance of growth in the stock markets than in a Cash ISA, although your capital will be at risk. You can also increase the potential upside by considering more adventurous assets for your portfolio.”
What are the risks?
There’s a risk that you will lose some or all of your money. Your investment will be linked to the performance of a company or group of companies, picked by you or a fund manager and linked to an index, sector, country or region. Higher growth prospects often come with higher risks. If you want to play it safer, you are less likely to see big returns.
Are they really for me?
If you have some spare money and don’t mind putting a bit of it at risk, then they could be. If you are investing in stocks and shares but haven’t used up your ISA limit, you should certainly put your investments in an ISA wrapper to save on tax. If you are disenchanted with savings rates and are considering stocks and shares instead, make sure you understand the product you are buying before committing – the risks might be too much for you. Most fund factsheets, which have to be made available to potential investors, show how risky a fund is on a scale of 1 to 7.
Finally, if you need access to the money in the short-term, such as for a holiday, then stocks and shares might not be the best place. The value of investments can rise and fall quite dramatically over a short-time period – it’s only over a long term that these ups and downs are smoothed out – so if you want the money in the next five years, then maybe stick with more readily available savings and investments.
What should I invest it in?
Stocks and Shares ISAs allow you to choose from investment trusts, Exchange-traded funds (ETFs), bonds, investment funds and company shares. They are available on “DIY” (Do It Yourself) investment platforms, “robo” platforms (which select a portfolio for you) and via wealth managers and independent financial advisers.
There are literally hundreds of funds available in the UK and hundreds of listed companies, so it can be difficult to know which to pick if you are not already quite experienced with a lot of research under your belt.
The investment pages of the national newspapers such as The Times, The Financial Times and The Telegraph, are a good place to start. Specialist magazines such as Investors Chronicle, Investment Week, Money Week and What Investment? are also helpful.
How should I invest?
You can either invest in lump sums here and there, or by making regular monthly payments, that can be as little as around £50. The benefit of making regular payments is that you buy when the market dips as well as when it rises, potentially getting more units for your money that can subsequently rise in value. This is called “pound-cost averaging”.
Lifetime ISAs can also be invested in Stocks and Shares. If you are eligible for one, up to £4,000 of your annual £20,000 limit can be invested in stocks and shares and at the point you access the money for the purpose of either buying a home or entering retirement, you will also get a 25 per cent government top-up (provided you haven’t made any withdrawals in the meantime).
FSCS investment compensation: how it works
While Cash ISAs up to £85,000 are covered by the Financial Services Compensation Scheme should the bank or building society fail, investments held in a Stocks and Shares ISA are covered up to the lower amount of £50,000 if the platform or broker enters default [see more here]. Importantly, you are not covered for losses due to the investment itself not performing as expected.