Investing Basics: Stocks and Shares ISAs
A Stocks and Shares or Investment ISA is a tax free wrapper that holds stock market and other types of investments; it comes with clear tax advantages but also the risk that the value of your investments could go down as well as up – writes Christian Leeming
Each tax year you have an ISA allowance, which is the amount you can put into tax-free savings and investments and that amount resets every new tax year; if you haven’t used it by midnight on 5th April, you lose it.
- Invest without paying tax on interest
- Annual tax free allowance of £20,000 in 2022/23
- Your capital is not protected and no returns are guaranteed
Stocks and shares should be seen as a medium-to-long-term investment option and whilst past performance does not guarantee returns, stocks & shares ISAs remain an important part of the DIY Investor’s overall strategy, generally performing better than cash ISAs which have struggled to deliver returns in the low interest environment.
However, highlighting the fact that investing should always be for the long term, the average stocks and shares ISA fund in the UK fell by 13.3% in the 2019/20 tax year due to the pandemic.
The most recent data available – for the tax year 2020/2021 – showed the average stocks and shares ISA returned 13.55%; generally speaking, stocks and shares ISAs have historically performed well. The average annual rate of return for stocks and shares ISAs over the past 10 years is 9.64%
Despite market uncertainty, people continue to move their ISAs away from cash-based products and into longer term investment products suggesting investors are becoming more comfortable in the current landscape.
The quality and performance of the funds and the fund managers you choose to invest your ISA in can have a significant bearing on how well your ISA will perform.
For those choosing the robo advice route, Nutmeg’s ‘SRI Portfolio 7’ was the best performing automated ISA last year, returning 13.7%.
These are all portfolios that reflect a medium risk tolerance, although performance differed for those preferring either higher or lower risk exposure.
‘the average growth of a Stocks & Shares ISA 2018/2019 was 4.8%’
To open a Stocks and Shares ISA you must be a UK resident aged 18 or over; you can only open an account with one provider each tax year, although you can have products from other providers in different years.
A wide range of providers and product types exist so it is worth finding out about the provider and the makeup of a particular product before you commit; every risk/reward profile is catered for and your choice should reflect your personal circumstances, your financial objectives and your risk tolerance.
If you sell an investment within a Stocks and Shares ISA you don’t have to pay any capital gains tax on any profits you may have made; higher-rate taxpayers also pay a lower rate of income tax on dividends within an ISA although there’s no benefit for basic rate taxpayers on dividends.
‘a Self-Select ISA which comes with all the tax benefits of a Stocks and Shares ISA but with total freedom for the account holder to manage the investments’
From April 2016 ‘radically flexible ISAs’ have allowed savers to withdraw and replace their savings within the same tax year without losing the ISA tax benefits.
This means that savers can use their ISA savings to cover short term needs, but replace them in time to retain the tax benefits.
Income from your investment is treated in the same way as a withdrawal but if you wish to increase your capital investment many products have an income re-investment option which adds any income to your capital.
Choose a Stocks and Shares ISA
The two considerations when choosing a Stocks and Shares ISA are based upon the choice of provider of the product and then the investments that it holds – possibly the ‘fund’.
Stocks and Shares ISAs are available from a whole range of investment platforms where you will find a lot of historical and product data to inform your decision.
Fees associated with your investment can make a big difference to the final outcome so make sure you understand what your chosen platform will charge you and what costs are associated with your investment.
The funds that Stocks and Shares ISAs invest in typically levy initial and annual management charges which can vary greatly; initial fees can range from 0.5% to 5.5% and ongoing management fees can be between 0.5% and 2% per annum.
What Investments can be Held?
- Shares – company shares listed on a recognised stock exchange
- Bonds and gilts – corporate bonds and government debt
- Funds – all types of passive and actively managed collective investments – exchange traded funds, unit trusts, OEICs and investment trusts
- Peer-to-peer investments – since 6th April 2016 peer-to-peer loans have been allowed in the new Innovative Finance ISA
Rather than a packaged product the more experienced DIY investor may consider a Self-Select ISA which comes with all the tax benefits of a Stocks and Shares ISA but with total freedom for the account holder to manage the investments made within it.
The investor may still choose to purchase funds within their ISA wrapper and may alter the balance of their portfolio over time – typically moving away from more risky investments as their financial objective approaches.
Many brokers allow you to set up regular monthly investments into a wide range of products with very low dealing commissions.
Transferring a Stocks and Shares ISA
You can transfer a Stocks and Shares ISA to another ISA, including a cash product at any time, subject to your provider’s terms and conditions; any funds withdrawn lose their tax-free status.
The current year’s ISA balance must be transferred whole and cannot be split between providers although prior years’ balances can be split.