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Are you confused by stocks and shares ISAs?

Are you confused by stocks and shares ISAs?

Category: ISAs

Updated: 24/02/2014
First Published: 24/02/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Saving for the future is something that consumers of all ages need to get into the habit of, with the younger age group needing to be particularly budget-focused if they want to realise their dreams of home ownership and comfortable living. While traditional savings accounts will be the first port of call for many, there are alternatives – stocks and shares ISAs, for example, could be a viable possibility, but research from AXA Wealth has revealed that a lot of young adults don't actually know what they are.

Confusion abounds

The figures show that almost a third (31%) of 18-34 year olds surveyed didn't understand what stocks and shares ISAs were or what they did, meaning a large proportion of young adults could be missing out on the potential that this form of saving can offer, while a further 30% are deterred from taking out this form of ISA for fear of being hit with excess charges or hidden costs – a perception which could easily hold people back.

However, despite the confusion and overall wariness of the product, the research found that the appetite to save is definitely there. Almost 40% would consider taking out a stocks and shares ISA if it was better explained while 27% would consider doing so if there were no difficulties or exit penalties, and 36% would consider investing if the product came with fewer risks.

The research highlights the lack of education and clarity surrounding these investment vehicles, despite the fact that a lot of providers are working to try and improve transparency and offer competitive prices. So, here at Moneyfacts we want to help demystify things a bit by giving you a quick overview of what stocks and shares ISAs actually are, to help you decide if they're right for you.

What are stocks and shares ISAs?

A stocks and shares ISA is a way to invest in a wide range of funds on the stock market whilst retaining the tax-efficiency of a traditional cash ISA, with the money held in such accounts being exempt from income and capital gains tax.

However, unlike cash ISAs, where savings are held at a bank or building society with interest being paid at a set rate, the stocks and shares version will actively invest your money across various funds in the stock market – meaning there's no guarantee of generating any return, but the potential for bigger returns is there.

A stocks and shares ISA is more of an investment product as opposed to a savings account, and as such there are different risks involved. You could still generate tax-free returns but there's no guarantee – you may end up with less than you put in, and the Financial Services Compensation Scheme only offers cover of up to £50,000 of the investment rather than the £85,000 associated with traditional accounts. It's more suited to those that take a long-term view of their savings, so those who are willing to tie up their money for longer could be more likely to benefit.

So, could they be right for you?

Despite the higher level of risk involved, a stocks and shares ISA could be a possibility for those who want to lose some of the security for the potential of bigger returns. There's no denying that they're a more complex product than cash ISAs but with the right kind of advice there's nothing to stop younger investors getting involved – just make sure you're comfortable with the risk and can take a longer-term view, as short timeframes won't have the same investment potential as longer ones.

They won't be suitable for those that might want to dip into their savings as the need arises, but, if you're happy with that, they could be worth considering. Just familiarise yourself with the details to remove some of the confusion and see if you can benefit from this form of saving.

What Next?

Find out more about stocks and shares ISAs

Looking for a tax-efficient investment opportunity for your 2013-14 ISA Allowance?

Speak to an investment specialist at our partner TQ Invest

Consider cash ISAs as a less risky alternative

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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