As well as Stocks and Shares, other types of ISA include Cash ISAs, Innovative Finance and Lifetime ISAs. You can contribute up to £20,000 per tax year (2024/25), and any money earned within an ISA is free of both income and capital gains tax.
As with any investment, however, the value can go up and down and you might get back less than you put in. This means Stocks and Shares ISAs are best suited for those who are comfortable with their money remaining invested for the long term.
How does a Stocks and Shares ISA work?
Stocks and Shares ISAs invest in various assets that have the potential to grow in value. You choose assets, or groups of assets known as funds, based on your financial goals and tolerance of risk.
Every UK resident over 18 can save up to £20,000 per tax year (2024/25) into an ISA. This is your annual ISA allowance. It doesn’t carry over from year to year, so it’s on a ‘use it or lose it’ basis.
You can have more than one ISA, but the £20,000 annual allowance applies across them all. It’s also based on the amount you pay in, rather than its current value. This means if you’ve already paid £20,000 into your Stocks and Shares ISA and its value drops, you can’t then top it up.
The benefits of a Stocks and Shares ISA
Tax-efficient - all the money you invest into a Stocks and Shares ISA is tax-free. This means you can invest up to £20,000 per tax year (2024/25) free of income tax and capital gains tax.
Flexibility - a Stocks and Shares ISA can be a flexible way to help you reach your financial goals. They have a wide range of investment options, or combination of options, tailored to your personal tolerance of risk. You can contribute regularly, or as one-offs when you can afford to. And, unlike a pension, there are no limitations on withdrawals, so you decide when you access your money.
Easy-to-manage - another benefit is that if you’re unhappy with your returns or fees, you can simply move to a new provider. This can be a full or partial transfer, where only part of your investment is moved. Transfers take up to 30 days, but watch out for possible exit fees.
Long-term growth potential - just like a pension, a Stocks and Shares ISA is made up of a range of different asset classes. Depending on what classes you’ve invested in, there are up to three ways in which they can increase in value. Shares might pay out a dividend, bonds may earn interest and both assets can appreciate - and depreciate - in value over time. Over the long term, an investment can benefit from the effect of compounding both the dividends and the interest it earns.
Easy introduction to investing - investing has long been seen as over-complicated. A Stocks and Shares ISA simplifies the process and removes barriers to entry, allowing you to start investing from as little as £1.
Should you invest in a Stocks and Shares ISA?
Ultimately, deciding if a Stocks and Shares ISA is right for you will come down to your tolerance of risk. You’ll need to consider the below.
Will you need to access the money in less than five years?
Investments can suddenly drop in value, making them less suited to short-term saving. Before opening a Stocks and Shares ISA, it’s important to have cash set aside in an accessible account for any emergencies.
How comfortable are you with risk?
Investing always carries a degree of risk. A Stocks and Shares ISA has the potential to lose value, as well as gain so you’ll need to consider that you might get out less than you put in.
Have you already used your total ISA allowance for the current tax year?
Every UK resident over 18 can save up to £20,000 per tax year (2024/25) across all their ISAs. If you’ve already used your allowance in other ISAs, then you’ll have to wait until the following tax year before investing in a Stocks and Shares ISA.
Have you got any debts to pay off?
Put simply, the interest rate you pay on even short-term debt is usually higher than investment earns. Consider paying off any credit cards or loans before making any long-term investments.
How to choose the right Stocks and Shares ISA
Before opening a Stocks and Shares ISA, there are two main types to look into and a range of platforms that you could open one with.
A ‘do-it-yourself’ Stocks and Shares ISA lets you pick your own investments. These often have lower fees and the widest selection of investments to choose from, but will offer little or no guidance. This makes them more suited to confident investors.
Alternatively managed platforms can offer more of a helping hand. They’ll ask questions about your financial goals and tolerance to risk, before guiding you to suitable funds. This makes them ideal for those newer to investing, or for those looking for a more hands-off approach.
Whichever option you choose, pay close attention to the fees. Whilst a Cash ISA is usually free, a Stocks and Shares ISA will have various fees. These might include platform fees, management fees, as well as buying and selling charges.
Finally consider the level of risk you’re comfortable with. There are a huge number of different platforms, funds and investments to choose from, each tailored towards different risk tolerances and financial goals.If you’re still unsure, consider seeking independent financial advice from a regulated Independent Financial Adviser (IFA).
If you’d like to hear more about pensions vs ISAs, listen to episode 17 of The Pension Confident Podcast. You can also read the transcript or watch the episode on YouTube.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 21-08-2024
