Compare Stocks & Shares ISAs

What is a Stocks and Shares ISA?

In the UK, anyone over 18 has a tax-free annual ISA allowance of £20,000. It’s possible to use all – or some – of the allowance to invest in stocks and shares. While many people opt for Cash ISAs, a Stocks and Shares ISA works differently.

These savings accounts let you hold funds, shares, and stocks and are popular because they can offer high returns on investments.

How is a Stocks and Shares ISA different to a Cash ISA?

In a Cash ISA, you can only hold cash. Providers can offer you variable or fixed interest rates for your investment, but you cannot hold stocks and shares within your account.

While Cash ISAs can guarantee a return on your investment, interest rates are so low currently that the options available are not attractive to many investors.

The returns in a Stocks and Shares ISA are potentially limitless depending on the underlying investments you hold within it. However, remember that your investments can go down in value as well as up, so you may need to wait out short-term losses to benefit from long-term gains.

How does a Stocks and Shares ISA work?

Stocks and Shares ISA is a pretty straightforward, tax-efficient way to invest, offering flexibility and a variety of options. Here’s how it all works, broken down in simple terms:

Contribution

The ISA allowance is £20,000 a year, and you won’t incur any tax on this amount. It’s important to remember that you can’t roll your allowance over to the following year. So, if you want to reap the maximum rewards of your investing, try to take full advantage of your yearly allowance.

Investment choices

You’ll also need to decide on which investments you’d like to make. With so many options available, it can be challenging. Here are the two most popular options:

• Shares: If you understand the stock market and have previous investing experience, you might choose to invest in individual shares. Being able to read the market also means your investments could experience long-term growth and pay dividends.
• Funds and Unit Trusts: People with limited experience can buy OEICs, Unit Trusts, and Investment Trusts in a range of sectors and countries that suitably diversify your portfolio. Fund managers choose the stocks and shares to invest in, but you can choose a particular fund or sector.

Remember, most ISA providers provide ongoing help and will happily offer advice.

Managing your investments

It’s vital to remember that the stock market can be volatile, and there’s no way to predict if your investments will grow as expected. In an ideal world, the investments would experience ongoing growth over time, earning you a positive ROI, but there are always risks.

The value of your investments can also decrease during economic crises, so it’s important to approach the experience with realistic expectations. If the firm fails, your investment might be covered by the Financial Services Compensation Scheme (FSCS).

Withdrawal

Most ISAs allow you to withdraw money from the account as and when needed, but some might have restrictions on certain investments.

As long as you align with ISA rules, any withdrawals are tax-free, making it an excellent option for those who may want access to their funds without worrying about extra taxes.

The types of Stocks and Shares ISA

If you already know what you want to invest in within your ISA, then you should look at what providers are able to hold your particular portfolio. Here are the most popular investments:

1. OEICs: These investment funds are actively run, with a manager pooling money from multiple investors into different assets. They are highly flexible, which is why people like them.
2. Unit Trusts: Unit Trusts are similar to OEICs, but their structure is usually more rigid. Most have a minimum investment amount.
3. Investment Trusts: As closed-end funds, investment trusts have a fixed number of available shares. Depending on market conditions, they can trade at a discount or premium.
4. Shares: Buying shares is investing in a company, which can be exciting. Remember, there’s a high amount of risk but also potential rewards.
5. ETFs: Exchange-traded funds (ETFs) are funds that track specific indexes, like the FTSE 100. They’re a low-cost way to build a diversified portfolio without being too hands-on.
6. Tracker Funds: Like ETFs, tracker funds follow an index. They try to mirror the returns of your chosen index and are a more passive way to invest.
7. Bonds & Gilts: If you want more security and stability, bonds and gilts will pay interest regularly. The downside is that these returns are usually less than you would get from stocks.
8. PIBS: Permanent Interest-Bearing Securities, also known as hybrid securities, combine equity and debt and can offer steady growth over time.
9. Ready-Made Portfolios: If you’re looking for something more hands-off, ready-made portfolios might be a good option. They come with a mix of investments already selected to match certain risk and return targets.

An investment platform where you pick your investments will usually facilitate most of these investments. Some ISA providers can only hold OEICs and Unit Trusts, so it’s worth checking before investing in case you want to buy a different product.

What are the benefits of Stocks and Shares ISAs?

Stocks and Shares ISAs offer a range of benefits, making them worthwhile if you want to invest your money and plan for the future. Here are the main advantages of opting for this type of ISA.

Capitalise on the stock market

An investment ISA is one of the more flexible options because it gives you access to a variety of stocks and shares. You can invest in a range of products, including bonds, EFTs, and shares, giving you the opportunity to create a diversified portfolio that aligns with your financial goals and desired risk levels.

Build wealth

When managed correctly, your portfolio can grow over time. The stock market is notoriously volatile, but making the right decisions and understanding how to navigate changes means you can make a positive ROI. This money can serve as a retirement fund or help you buy your dream home.

Enjoy tax benefits

There are three main tax benefits of a Stocks and Shares ISA to be aware of:

1. Capital Gains Tax (CGT): You will never have to pay CGT on the growth that your investments make in an ISA
2. Income and Dividends Tax: Any income or dividends generated by assets within your ISA are 100% tax-free
3. Interest Earned Tax: If you earn interest on your investments, you won’t have to pay any tax. This includes corporate gilts and bonds.

Potential charges include:

• Annual Management Charge (AMC): An ISA provider might charge an ongoing fee for managing your investments. The amount is usually a small percentage of how much you invest.
• Fund Management Charges: If you invest in funds like Investment Trusts, OEICs and Unit Trusts, you’ll pay fund management charges.
• Platform Fees: Some platforms might charge users for accessing their services, which might be a percentage of your investments or a one-time fee.
• Stamp Duty Reserve Tax (SDRT): If you’re buying individual shares through your ISA, there’s usually a 0.5% SDRT fee on purchases over £1,000.
• Inheritance Tax: In the event of your death, the beneficiaries of your estate could still be required to pay Inheritance Tax on the value of your ISA
• Exit Fees: Some providers have fees for moving to another ISA provider or closing your account. Make sure you check these fees before choosing an ISA.

How can I find the best Stocks & Shares ISA?

When choosing an ISA, it’s vital to consider numerous factors, including how it aligns with your needs and what you hope to gain from using it. Here’s what you should think about when making a decision.

The best stock ISA for one person may not be the best ISA for you, so make sure you apply all these factors to your situation and preferences.

Income or accumulation investment funds?

With funds, any dividends paid by the companies the fund invests in can either be given directly to investors or automatically reinvested back into the fund.

If the fund name ends with “(Inc),” short for “Income,” it means that any income the fund generates will be paid out to your stock ISA’s cash account. From there, you can withdraw it as personal income, and the good news is, since it’s from an ISA, it’s completely tax-free.

If the fund ends with “(Acc),” which stands for “Accumulation,” the income isn’t paid out. Instead, the fund manager reinvests it into the fund automatically, helping your investment grow without you lifting a finger.

So, if your goal is long-term financial stability, an accumulation fund might be best, but income funds can be beneficial if you want to make some regular money.

Would a Ready-Made Stocks and Shares ISA be best for your needs?

Some people take to the stock market like ducks to water. Others find managing their money challenging, which is why many companies offer ready-made portfolios. Professional portfolio managers hand-pick these funds, each aligning with a set degree of risk.

Risk profiles range from Cautious and Defensive to Balanced and Adventurous, and the right one for you will depend on your attitude to risk and your personal circumstances.

A higher-risk portfolio will typically have a greater level of volatility over the short term but a greater potential for returns over the longer term.

Remember to find Stocks and Shares ISA providers with a positive reputation

Always do your research on an ISA company and check to see whether it has positive reviews. The customer service team is a vital consideration because nobody wants to sit in a queue for hours.

You could experience plenty of problems with your ISA, including being locked out of the account or dealing with a security breach; make sure you’ll always have support. Choosing a Stocks and Shares ISA provider with live chat and a dedicated support team gives you peace of mind.

Is the account easy to use?

You’ll also want to choose ISA account providers that simplify the process. Nobody wants to spend ages searching for answers, so look for companies with seamless platforms. Industry awards are also a sign that the provider focuses on user experience.

Even if an ISA company charges more, it’s always worth weighing up whether the platform’s UX justifies the extra cost.