What is a Stocks & Shares ISA and who can open one?
A stocks and shares ISA is a tax efficient investment account, with any profit gained being exempt from income and capital gains tax. However, unlike a cash ISA where you will get back at least what you put in, the value of an investment in a stocks and shares ISA may go down as well as up.
To be eligible you must be a UK resident aged 18 or over.
How Does a Stocks & Shares ISA work?
As its name suggests it acts as a tax-free wrapper for stock market investments, however this can be a bit misleading as it also possible to invest in a variety of different investments within a stocks and shares ISA, including: Investment trusts; Funds; Open Ended Investment Companies (OEICs); Unit trusts; Government bonds (Gilts); and Corporate bonds.
For the 2017/18 tax year, it is possible to put your full ISA allowance, up to £20,000, into a stocks and shares ISA. Alternatively you can choose to split your investment amongst the other available ISAs: Cash ISA, Innovative Finance ISA or the Lifetime ISA. Whether you decide invest in one ISA or split your investment, you can choose between making a lump sum investment and/or making regular or ad hoc contributions throughout the tax year.
Depending on your investment experience and your personal preferences, a stocks and shares ISA investment will usually take one of the following two approaches:
- The Self-Select Approach
- The Managed Approach
The Self-Select Approach
A self-select ISA allows you to choose which assets you want to hold in your ISA, as opposed to having a fund manager make the decision for you. Whilst choosing your own investments gives your much greater control, the self-select approach requires you to monitor and manage your investments on an ongoing basis. Therefore, if you are an experienced investor, who fully understands the risks involved with investing in a Stocks and Shares ISA and the time to dedicate to managing your portfolio, then this could be an option for you.
The Managed Approach
The other option is to opt for a Stocks and Shares ISA that is managed by a team of experts. If you do not have the confidence, or the time, to pick your own investments this option allows you to simply outline your financial situation and attitude to risk, which will enable someone else to tailor the investments to your personal goals.
An alternative option is to invest with a Robo-Advisor. Check out our guide on investing with a Robo-Advisor for more information.
Who Provides Stocks and Shares ISAs?
There are many different types of providers of stocks and shares ISAs. These include online investment platforms, stockbrokers, bank/building societies, fund managers or independent financial advisers. It is important that you review all of your available options before making a decision on who to set up your stocks and shares ISA with.
OFF3R has a Stocks and Shares ISA investment channel that lists some of the leading ISA providers in the UK and allows you to compare the opportunities currently available.
Please head over to the OFF3R Stocks and Shares ISA channel to compare ISA providers.
Stocks & Shares ISA in 4 Bullet Points:
- You can invest your full £20,000 ISA allowance in a stocks and shares ISA or split the investment across different ISA products.
- You can withdraw your money at any time, however a stocks and shares ISA should be viewed as a longer term investment, at least 5 years.
- You have the choice of choosing the investments yourself, via a self-select ISA, or opting for an advisor to manage your investment for you.
- You can choose whether to make lump sum, regular and/or ad hoc investments into your stocks and shares ISA.
Should you Invest in a Stocks & Shares ISA?
As with any form of investment, the value of your money can decrease as well as increase when you invest in a Stocks and Shares ISA. To help you decide whether this form of investment is for you, we’ve listed the advantages and disadvantages, along with a list of questions to ask yourself before investing:
Advantage – Potentially higher returns than a Cash ISA
Due to the nature of investing in a broad range of assets, a stocks and shares ISA can potentially offer higher returns than a cash ISA. The stock market over a long period of time has typically outperformed many other types of investments and savings accounts . However, you should be aware that this isn’t without risk. If the stock market falls you could stand to lose money, including your original investment.
Disadvantage – Your investments can fall in value
Due to the fluctuating nature of markets, there is no guarantee that the value of your investments in a stocks and shares ISA will rise. More importantly, you must be aware that there is a chance that you could see the value fall. Therefore, a stocks and shares ISA should be viewed as a long-term investment, ideally of at least 5 years.
Disadvantage – Charges
Based on the investment approach you take and your choice of ISA provider, you will be required to pay charges. Generally, if you opt for the self-select approach, these charges will tend to be lower than those of a fully-managed portfolio. Dependent on the provider, a stocks and shares ISA can be subjected to the following: management fees; portfolio fees; charged on buying and selling shares; and fees for exiting the investment.
Advantage/Disadvantage – Tax efficient but not tax free
Unlike a Cash ISA, a Stocks and Shares ISA is not completely tax free. Whilst you do not have to pay income or capital gains tax on any growth on your investment, you are still subject to 10% tax on any income on share dividends (outside of your tax-free dividend allowance which is £5,000 for the 2017-18 tax year)
Need to Know
- Review – Don’t Alter – A stocks and shares ISA should be viewed as a long-term (at least 5 years) investment. Providing your original portfolio is set up on a sound basis, you should aim to leave it. Annual reviews tend to be a sensible option for reassessing your stocks and shares ISA investments and ensuring they have not strayed too far from your desired asset allocation. This gives you the option to rebalance if necessary.
- Stamp Duty – It is important to note that even within a stocks and shares ISA, there is one tax you can’t escape, stamp duty. You are required to pay stamp duty when you purchase most shares (apart from those listed on the AIM) and funds. It is currently charged at 0.5%. However, there is no stamp duty to pay when you sell.
Questions to Ask Yourself Before Investing in a Stocks & Shares ISA
- Will you need access to your cash?
- It is important as investor you choose the right option for you, whether this be a self-select ISA or a managed ISA.
- Are you prepared to accept a level of risk? If you need the reassuring security of knowing that you will get back at least the amount you originally invested into your stocks and shares ISA then this may not be the right option for you. Investing in a stocks and shares ISA requires you to accept that a certain level of risk in order to return a potentially higher reward.
With investment, your capital is at risk. Investments of this type are subject to illiquidity (the inability to sell assets quickly without the substantial loss in value)and you should be aware that the value of your portfolio can go down as well as up and you may get back less than you invest. A Stocks and Shares ISA may not be right for everyone and tax rules may change in the future. If you are unsure if an ISA is the right choice for you, please seek independent financial advice.