Fixed savings rates may be showing signs of improvement, but it can't be denied that keeping your money in cash isn't exactly profitable at the moment. After all, once inflation at 2.3% is taken into account, there's only one bond that can match it, with negative interest being a reality for many. That's why investment ISAs are becoming increasingly appealing.
What are investment ISAs?
Investment ISAs, otherwise known as stocks & shares ISAs, are a way of investing in stock market funds while maintaining tax efficiency. You invest through an ISA wrapper to ensure any returns are tax-free, but rather than saving in cash, you're actively investing in the stock market, and therefore have the potential to secure far higher returns than in the cash ISA sector.
However, you're also exposed to higher risk, which means the value of your investment could go down as well as up. There's no guarantee that you'll end up with positive returns and you may even end up with less than you put in, but because of the potential for growth, many investors find it a worthwhile trade off. You can find out more about stocks & shares ISAs, together with both their risks and reasons for investing, here, and you'll also want to seek independent advice to make sure it's the right decision.
What to think about when choosing an investment ISA
- Charges. Unlike a cash ISA, stocks & shares varieties will typically come with various charges and fees, depending on the wrapper and type of investment. You may have to pay an annual management charge or platform charge, for example, or a dealing charge when you buy/sell funds on the platform (often when you're actively managing your ISA), so make sure you know what you'll be facing.
- Contributions. Some accounts require lump sums while most will let you regularly invest, known as "drip feeding", which is thought of as being one of the best ways to ensure your investment rides out any market fluctuations.
- Wrapper and fund choices within it. The wrapper (or platform) you choose to invest with may have several funds within it, so just bear in mind that they're not the same thing as each other. As you can see on our stocks & shares ISA page, some wrappers have only one fund available while others have thousands, so it's worth doing a bit of research to see which funds, and wrappers, are most appropriate for you.
- Risk appetite. Choosing the right funds will often come down to your risk appetite or risk profile – in other words, how comfortable you are with the fact you may lose money. If you don't want to take any risk with your money whatsoever, investment ISAs won't be for you, but from then on you'll be able to choose between funds depending on the riskiness of the assets they invest in.
- Consistent performance. Past performance should never be seen as an indication of future returns, but it doesn't hurt to choose a fund that's consistently performed well in recent years, provided it meets your risk appetite and investment objectives. Don't just base all your hopes on one record year – the key is consistency, so make sure to look at the figures over a three, five or even 10-year period. It's worth bearing in mind that performance may depend on the management team or fund manager as much as the market, so always consider that aspect as well.
Selected Investment ISAs to consider
There are many things to think about when choosing an investment ISA, and the list above is in no way exhaustive. It's a risky undertaking that should only ever be considered by those who are comfortable with risk and are happy to take specialist financial advice, so make sure to speak to an independent adviser before you go any further.
However, if it's something you're considering, it's worth knowing the kind of options you could choose from. Below is just a taster of the kind of investment ISAs and wrappers available, to give you a feel of what's out there. You can find more options by heading to our stocks & shares ISA page, or if you want more details on the funds listed below, click on the relevant links.
Prudential Stocks & Shares ISA
- Min. investment: £50 per month or a £500 lump sum
- Funds available: 4 PruFund funds (multi-asset arrangements that invest in a range of assets such as shares, property, bonds and cash)
- Managed funds – Prudential's investment experts manage the funds for you
- One annual management charge of 1.35%
- No exit fee
- 24/7 access to your account – can easily view daily evaluations and withdrawals
- The Prudential Stocks & Shares ISA is provided by Capita Financial Investments Limited
Nutmeg Stocks and Shares ISA
- Min. investment: £500 (plus £100 per month for ISAs below £5,000)
- Funds available: 10 managed (fully managed by an expert in-house team) and 5 fixed allocation portfolios (designed to remain steady and rebalance automatically)
- Simple online set-up
- Fee structures vary from 0.25% to 0.75% depending on the amount invested (inc. VAT)
- No tie-ins, set-up fees or exit charges
Barclays Stocks & Shares ISA
- Min. investment: £50 or £50/month
- Funds available: Over 2,000 (including ETFs, bonds, gilts, shares and more)
- Offers flexible ISA arrangements
- Administration charge of £30/year (plus VAT)
MoneyFarm Stocks and Shares ISA
- Min. investment: £1
- Funds available: 12 portfolios (tailor-made to suit the investor's profile and fully managed on their behalf)
- Fees range from 0% to 0.6% with no extra costs; first £10,000 managed free of charge
- £20,000 managed free of charge for one year with code MFACT20K
All these ISA providers are authorised and regulated by the Financial Conduct Authority and investments are protected by the Financial Services Compensation Scheme up to a maximum of £50,000. Remember, with any fund, the value of an investment can go down as well as up, so you may not get back what you put in. Tax rules may change in the future, and will depend on your individual circumstances.
Find out more about investment ISAs
Compare stocks & shares ISAs