There's no getting away from it – savings rates aren't exactly enticing at the moment, and it's often difficult to generate any form of meaningful return. ISAs tend to be the best bet as interest is entirely tax-free but even these rates are on a general downwards spiral, and that's why a lot of people are turning to stocks & shares ISAs instead. Are you one of them?
Figures from the Investment Management Association revealed that investors put £520m into stocks & shares ISAs in July this year, with many taking advantage of the new £15,000 limit that was introduced at the start of the month. Despite this being far lower than the amount deposited into cash ISAs – which totalled almost £5bn over the month – it's a clear increase on the same time a year ago.
In July 2013 just £125m was added to stocks & shares ISAs, with this subsequent increase highlighting the growing popularity of this form of saving. Arguably, it comes as the restrictions surrounding these investment ISAs have been relaxed, with savers having far more flexibility in deciding how to move around their savings.
Even discounting the new rules, it's no wonder that stocks & shares ISAs are becoming so popular. They offer the potential for far better returns than their cash counterparts as you're actively investing in the stock market, so your returns won't be determined by a set interest rate but will instead depend on the performance of your chosen funds.
Of course, even though the returns could be higher, the very fact that you're investing in the stock market means they could be lower, too. There are far more risks involved in this form of saving which is why it's vital you're comfortable with the process, so to help you decide if stocks & shares ISAs are right for you, we've put together a bit of an overview.
A stocks & shares ISA, otherwise known as an equity or investment ISA, is a way to invest in a wide range of funds on the stock market rather than keeping your savings in cash. But, it retains the tax-efficient element of a traditional cash ISA, with the money held in such an account being exempt from income and capital gains tax. You can hold individual company shares if you wish, or you might like to opt for the managed option of collective funds.
Essentially, you're putting your investments in an ISA wrapper, making it a highly tax-efficient method of investing. You don't have to pay any capital gains or income tax on the returns, but you will need to pay a 10% tax credit on any share dividends you receive, and as you're investing in the stock market, it's a lot riskier than regular saving.
Unlike cash ISAs, where savings are held in a bank or building society account and pay a set interest rate, the stocks & shares version will actively invest your money across various funds in the stock market for the potential of bigger returns. Because of this it should be viewed as an investment product rather than a savings account, as it's a higher-risk home for your money.
Thanks to the new rules implemented in July you can save up to £15,000 in a stocks & shares ISA in the 2014/15 tax year, and the rules regarding cash and investment ISAs have been relaxed, too. Some providers (usually only those that offer stocks & shares ISAs) will let you hold both investments and cash in the same account, and a stocks & shares ISA can now be transferred to a cash version if the provider allows it. This was previously only permitted the other way round, from cash to stocks & shares, and will be welcome news for those who might want the option of switching back to cash at a later date.
Stocks & shares ISAs could be a great way to save if you're comfortable with an element of risk, but you need to be aware of the drawbacks too. Here's a quick overview of the pros and cons associated with this form of saving.
Hopefully this has helped clarify some things, but you'll want to consider seeking further advice before you take the plunge.
But, if you're serious about saving and have a bit of financial savviness about you, stocks & shares ISAs could well be a viable option. The added risk and commitment needs to be carefully weighed up and it's vital you've got a bit of knowledge behind you before you opt for this kind of investment. However, if you're comfortable with the risks involved, you might find you're able to generate far better returns than through a traditional account.
Choose a stocks and shares ISA.
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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