Leanne Macardle

Leanne Macardle

Editor
Published: 31/01/2019

At a glance

  • Stocks and shares ISAs offer a tax-efficient way of accessing the stock market.
  • While the potential returns on offer are significantly higher than those available through a cash ISA, your funds are at risk too.
  • Investors should look to leave their funds untouched for at least five years.
  • A return is not guaranteed.

Different types of stocks and shares ISAs

A stocks and shares ISA will invest your money across your choice of funds in the stock market. The majority of such accounts use collective investment funds, such as Unit Trusts or Open Ended Investment Companies (OEICs), and investors can either receive a form of income during the term of their investment or wait until they cash in their pot.

Stocks and shares ISAs can comprise of:

  • Corporate bonds. You ‘lend' your money to a corporate entity in return for interest.
  • Government bonds. As above, except you're lending money to a government.
  • Shares. You invest in an individual company, and if the value of that company goes up, so does the value of your share (and vice versa).
  • Funds. These can include a range of entities, often covering bonds, shares and even cash, allowing you to diversify your investments without needing to engage in individual stock trading. Funds typically have a set theme (such as a particular geographical location or industry) and investments are made accordingly. Most stocks and shares ISAs are based on funds.

Funds will typically be set up as:

  • Unit Trusts – these are set up in trust form, meaning it's a separate entity from the fund manager's company; when you invest you get ‘units' of that trust.
  • OEICs – open-ended investment companies – OEICs for short - are investment funds that are set up using company law as a separate entity from the fund manager's own company; when you invest you get a specified number of shares.
  • Life insurance funds – a portfolio which can be made up of stocks, bonds, cash and alternative.

Choosing a stocks and shares ISA

In many cases, you'll be choosing your stocks and shares ISA – and by default, your funds, bonds or shares, etc. – through a platform, which is essentially a ‘fund supermarket'. You first need to decide on the platform (or provider) you want to use before deciding on the funds you want to invest in.

This decision can be based on many things, such as the minimum investment, the fees, the range of investments or the amount of flexibility it offers you in managing your funds – there is no such thing as the best investment ISA, only the one that works best for you. 

Stocks & shares ISA rules

  • You can invest up to £20,000 in the 2019/20 tax year
  • You can only contribute to one investment ISA in any tax year, but you can split the £20,000 allowance between different kinds of ISA as you see fit
  • You can choose to make regular monthly payments, or invest a lump sum
  • You are not tied to the same ISA manager year-in-year-out, you can transfer to a different platform, but should follow the transfer rules (see below) to retain the tax-free advantage of investing via an ISA, do not simply cash in your existing ISA as it will lose its tax-free status, and if the cash mounts up to more than your yearly allowance, it could prove costly.
  • Your ISA savings from previous years can be split into different accounts, but if you want to move this year’s allowance, you must transfer the full amount
  • You can switch from a stocks and shares ISA to a cash ISA, and vice versa should you wish
  • ISA firms must allow transfers out, but there are no rules to force them to accept transfers in, so make sure you check before you start the process
  • You cannot carry the allowance forward to the next year, so if you don’t use it, you lose it!

Stocks & shares ISA transfers

It's worth pointing out that, although you can only pay into one active investment ISA per tax year and can only invest £20,000 in ‘new' money, there's nothing to stop you from moving previous years' savings between different accounts. This won't count towards your annual allowance, so you can move money around from previous years and still make new contributions, and there's no limit to the number of stocks and shares ISAs you can accumulate over the years.

Reasons to transfer

There are several reasons you may want to move investment ISA funds from one account to another. You may have calculated that you'll be better off with a different provider that offers lower fees, or perhaps one that has a wider investment choice with more share trading opportunities. You may simply be unhappy with your current provider and want better value and enhanced customer service – in any of these scenarios, you'll want to compare investment ISAs to scout out the best investment funds, and potentially move your money over.

The stocks & shares ISA transfer process

There's a special process you'll need to follow if you want to retain the tax-efficiency of your already invested funds – don't simply sell the shares, withdraw the proceeds and start from scratch – and there are a couple of routes you can go down.

  • In-specie transfers. This involves a stock transfer whereby all the investments you hold, and all the funds you're invested in, are transported to your new provider with you staying invested throughout the process. This type of transfer is ideal for those who are happy with their investments and don't want to make any changes or get involved in new stock trading, but because you're still invested, the process can take longer (typically four to six weeks). There may also be exit fees to pay, which you should always look at when comparing the best investment ISA funds.This only works if the new provider offers the same funds as your existing one. If not you will need to do a cash transfer.
  • Cash transfers. This option involves you selling your investments and the proceeds being sent to your new provider, effectively allowing you to start the process over and begin investing in shares from scratch. Despite this, the tax-free status of your money remains intact, and your new provider will reinvest those funds according to your instructions. It's generally a quicker process, but as you're not invested you could miss out on gains from your previous investment, so it will depend on your goals.

Cash ISA transfers

There's also the option to transfer funds held within a cash ISA into a stocks and shares version, and likewise, you can transfer your stocks and shares ISA into the security of cash should you wish. Again, there's a set process to follow with each, and you'll need to contact your new provider and fill in a transfer form to retain your money's tax-free status.

Find out more about cash ISA transfers

Is investing a good idea?

This question all comes down to your personal circumstances and your attitude to risk. Investing in stocks may not be entirely safe, but it can be ideal for those who can afford to lose some of their cash if the market doesn't perform as well as was hoped, as for some, the trade-off of potentially far higher returns could be worth it.

After all, investments have a far higher chance of beating inflation over the long term. The best performing stocks and shares ISA certainly looks far more appealing than the top cash alternative, but again, there are risks, so you'll need to weigh up the facts, and past performance is no guarantee of what the fund might achieve in the future.

Should I consider both kinds of ISA?

This depends on your attitude to risk, and the phrase “don't put all your eggs in one basket” is particularly worth remembering.

Cash ISAs will be preferable for those who don't want to take any risk whatsoever with their money, and would instead prefer the security of capital protection and a guaranteed return.

Stocks and shares ISAs, on the other hand, could be ideal for those who can afford to take more of a risk with their money and are comfortable with taking a long-term view, with their key objective being long-term growth (or income, depending on the type of account chosen). Of course, you'll want to keep a certain amount of cash savings accessible at all times – either in an easy access cash ISA or traditional savings account – but if you've got a suitable financial buffer and want the potential of greater returns, a stocks and shares ISA could be worth considering.

Fees and charges

With our stocks and shares ISA comparison charts you can choose from several platforms and fund managers, most of which have a range of funds you can invest in thereafter. It's worth pointing out that you'll typically be charged both for using the platform and for buying the funds – investing in stocks and shares always comes with associated fees – so make sure to consider both when comparing accounts.

Risk versus return

Once invested, the returns you receive from your stocks and shares ISA will be linked to the performance of funds, stock markets or specific shares, depending on the type of account you choose, and the profit you receive will be based on that performance. However, this is where the risk comes in – the value of your investments can fall as well as rise and your capital isn't guaranteed, so like with any form of share trading, you may get back less than you put in.

Whichever stocks and shares ISA you choose, you will need to make sure that the entities you invest in meet your objectives and you are comfortable with the level of risk involved. You should regularly review the performance of your chosen funds to ensure they are suitable for you over the longer term.

What's the difference between a cash ISA and an investment ISA?

Stocks and shares ISA

Cash ISA

Provides access to potential growth in the stock market

Interest added every year or more frequently

The value of your investment can fall as well rise

Original deposit guaranteed to be returned

Should look to invest for five years or more

Better option for short-term saving

Wide range of investment options

No investment choice, but can choose fixed or variable rate

Withdrawals can take up to 10 days

Variable rate accounts can offer instant access; fixed rate accounts see funds locked away for up to seven years - access may be allowed but at a penalty

FSCS protection cover up to £85,000 per firm

FSCS protection cover up to £85,000 per firm

 

The key difference between cash ISAs and investment ISAs is that the cash version holds onto your cash and pays interest at a set rate – either variable or fixed, the latter guaranteeing your eventual returns if you invest a lump sum – with your capital not being subject to investment risk. Interest will be paid entirely tax-free, and even when interest rates are low, you can be safe in the knowledge that you won't lose your initial deposit.

In contrast to a cash ISA, stocks and shares ISAs actively invest your money into external funds or company shares for the potential of bigger returns – you're actively buying and selling shares, either personally or through a managed portfolio. An investment ISA is not a savings account, and should be viewed purely as an investment product.

Income or growth

It's far more complex than a cash version – there are several different products you can choose from and funds you can invest in depending on your goals, with the key decision being whether you want to generate an income (in which case you'd choose income generating funds, denoted by the term “Inc”) or grow your initial investment (whereby you'd need accumulation funds, denoted by the term “Acc”).

Long-term view

You need to make sure you're comfortable with the level of risk involved, as well as the long-term nature of equity ISAs – investing in shares requires a long-term view, which means you should be willing to keep your money invested for several years (while most funds can be sold at relatively short notice, this type of account won't be good for those who may need to dip into their savings in an emergency, so make sure you view it as a longer-term undertaking).

This offers the best scenario for growth and will give you the chance to weather any fluctuations in the stock market, and hopefully secure a profit at the end of it. But there's no guarantee – a stock and shares ISA is a higher-risk home for your money, with the returns based on the performance of the specific funds, so there's a chance you could lose some or all of your initial investment, potentially leaving you with less than you put in.

No guarantees

Past performance should never be seen as an indicator of future returns, so even if you pick the best performing stocks and shares ISA funds, you can't guarantee that the same performance will continue. This means that, despite the potential to secure better returns than with a traditional savings account, it's important to be prepared that you may end up worse off. There are different rules regarding FSCS protection, too – while ISA investments are covered by the FSCS, they will only be covered up to £50,000 instead of the £85,000 that cash ISA savers benefit from.

Tax - inheritance

You'll also want to remember that, even though your investments will essentially be held in a tax-free account, there could still be certain tax payments and fund charges applicable. Investment ISAs are exempt from income and capital gains tax, including dividends if held within an ISA. ISAs will form part of your estate on death so could be subject to inheritence tax. However, these ISAs will usually charge fees, particularly when you're actively stock trading, so always check the small print to see if the particular account is worth it.

Moneyfacts tip

Moneyfacts tip Leanne Macardle

There may not be a single best investment ISA, but if you carefully compare stocks and shares ISAs, you should be able to find the best stocks and shares ISA for your requirements.

Understand the risks

This really can't be reiterated enough – before you start stock or share trading through an investment ISA, you need to be fully aware of the risks involved, and more importantly, you need to be comfortable with those risks.

  • Any investment comes with an element of risk, particularly those with the prospect of higher returns, and this is certainly the case with stocks and shares ISAs. Over time there could well be fluctuations in the value of an investment, with the total value and any income generated going down as well as up, and in a volatile market some investors may get back less than they put in.
  • Different types of investment funds have different levels of risk - or to put it another way, they will be more volatile. For example, funds investing in smaller companies or emerging markets will be more volatile than funds that invest in UK blue chip firms. Also, growth funds investing in shares are likely to be more volatile than funds investing in fixed interest investments such as Government gilts or corporate bonds.
  • It is usually a good idea to invest across a range of investment types (or asset classes) such as shares, bonds, property and cash to spread your risk. How much you invest in each category will depend on how much risk you are prepared to take, and how long you intend to invest for. Whatever you choose, remember that past performance should never be seen as an indicator of future returns – even the best performing stocks and shares ISA can disappoint.

Ultimately, remember that this kind of account will always be riskier than a cash ISA, and it should be viewed as a long-term investment to counter the risks of stock market volatility. Tax advantages will depend on your circumstances and may change in the future.

Protection

Stocks and shares, like their cash ISA counterparts, are regulated by the Financial Conduct Authority, which means that investing in a stocks and shares ISA should not come with the risk of the ISA provider running off with your funds. The risk therefore comes solely from the nature of investing in the stock market, with £85,000 protected (per person, per institution thanks to the FSCS) should the provider go bust.

Disclaimer: This is a basic guide to stocks and shares ISAs. It does not cover every circumstance and nor is it intended to be a source of advice. This information is aimed at customers within the UK. Tax treatment depends on your individual circumstances and may be subject to change.

Pros and cons of stocks & shares ISAs

  • Investment ISAs allow for tax-free investing, meaning you won’t have to pay income or capital gains tax on any gains
  • Gains are likely to be better with an investment ISA than you could earn in interest on a cash ISA, if you take a long term view of your investment
  • It is possible to invest in different markets enabling you to diversify your portfolio
  • If your funds underperform, you do run the risk of losing money
  • FSCS protection only covers you up to £85,000 per firm. The FSCS does not protect against investment losses, only if your investment provider goes bust

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

businessman counting coins

At a glance

  • Stocks and shares ISAs offer a tax-efficient way of accessing the stock market.
  • While the potential returns on offer are significantly higher than those available through a cash ISA, your funds are at risk too.
  • Investors should look to leave their funds untouched for at least five years.
  • A return is not guaranteed.

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