Q&A: Should I invest in a stocks and shares ISA?

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Are you considering investing some or all of your ISA allowance in the stock market? If so, check out our beginner’s guide to stocks and shares ISAs.

In the current tax year it is possible to invest up to £10,200 in a stocks and shares ISA. Nevertheless many savers seem reluctant – perhaps believing these products are too complex or carry too great a risk. In fact, research from the Tax Incentivised Savings Association (TISA) found cash ISAs are four times more popular than stocks and shares ISAs.

We answer some of the most commonly asked questions about stocks and shares ISAs as well as exploring the pros and cons.

What is a stock and shares ISA?

A stocks and shares ISA (also known as investment ISA) allows you to invest in various investment markets without paying tax on the interest earned from your investment. However, you still pay tax on any dividends you receive from your shares at a rate of 10% which is deducted at source.

Unlike most other investments, stocks and shares ISAs are exempt from capital gains tax.

How much can I invest?

During the current tax year which ends on 5 April, you can invest up to £10,200 in stocks and shares ISA.

Note, however, you will only be able to invest £5,100 in a stocks and shares ISA if you have used your full cash ISA allowance of £5,100.

What types of stocks and shares ISAs are there?

If you feel confident in your knowledge of the financial markets, you might want to consider a self-select ISA. These products allow you to choose the investments yourself and your stocks and shares ISA will usually be managed by a stock broker or bank.

Investors with a self-select ISA can opt to invest in a range of financial products including government bonds, corporate bonds, shares, exchange traded funds and unit trusts.

For those without significant financial knowledge, you could opt for a collective investment – this is where money from a group of investors is pooled into one fund. A fund manager will select investments on your behalf.

An index tracker fund is a popular investment fund – these move in accordance with the overall activity of a particular index. For instance Virgin’s FTSE All-Shares ISA allows you to invest in all the companies on the London stock exchange.

Alternatively you could invest your cash via a fund supermarket which allows you to select a variety of investment funds from different brokerage firms under the umbrella of one investment vehicle.

Quiz

Test your ISA knowledge

With ISA season already upon us, time is running out to use this year’s tax-free savings allowance. But just how much do you know about ISAs? 

 

Let’s start simple. What does ISA stand for?

Individual Savings Account

Interest Saver Account

Interest Saving Allowance

What kind of tax is charged on the interest from a cash ISA?

Capital Gains Tax

None

Income Tax

Last year, the government launched junior ISAs as a replacement for the abolished Child Trust Funds. How much can be saved into one of these accounts during the current tax year?

£5,340

£3,600

As much as you like

When is the last date you can use this year’s ISA allowance?

5 April

31 December

9 September

What happens to your ISA after the tax year has finished?

You start paying tax

It remains tax free

You pay tax at a reduced rate

0 / 5

Score: 0 out of 5

Retake the quiz

What are the risks?

While the returns from a stocks and shares ISA are potentially far greater than a cash ISA, the risks are also much higher.

Because the markets are volatile, you may find that the value of your investment goes down as well as up and you could lose your initial investment completely.

With many investment ISAs your original capital is not secure. Bear this in mind when deciding where to invest and don’t simply look at the potential returns.

If you are uncomfortable with this risk to your capital, a stocks and shares ISA might not be the most appropriate option for your money. Otherwise you might want to seek independent financial advice so you can fully explain all the potential risks and rewards.

Furthermore, you should remember that a fund's past performance is no guarantee to future profits. Although a fund has performed well in the past, it may not yield similar results in the future..

Are there any other downsides?

With a stocks and shares ISA, there could be annual charges to cover the cost of a stock broker or fund manager. In addition there could be charges for buying and selling shares, inactivity fees and charges when you set up the fund.

Although charges associated with an investment ISA may seem a negative feature, you are potentially paying for expert advice that will see far greater returns than a cash ISA.

As a negative, however, fund managers and stock brokers possess various levels of financial acumen. In a worst case scenario you could be paying for very poor advice and investment performance

Is a stocks and shares ISA for me?

Investment ISAs are more much complicated than cash ISAs and not an appropriate option if you are uncomfortable with risks.

However, those who seek independent advice and fully understand their investments could see significant benefits and some funds generate returns over 30% in three years.

In addition, a stocks and shares ISA is normally only appropriate for those who wish to invest their money for a number of years. Because the markets can go down as well as up, this should give you time to ride out the turmoil in the market.

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**

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