A stocks & shares ISA, otherwise known as an equity ISA or investment ISA, is a tax-efficient way to invest in a wide range of funds and other stock market investments. Unlike cash ISAs, where savings are held in a bank or building society account, the stocks & shares version requires you to actively invest your money across your choice of funds in the stock market or directly into company shares. The majority of such accounts use collective investment funds.
With a stocks & shares ISA, you can invest in:
While you can hold individual company shares in an equity ISA, most are fund-based ISAs, which will be run by an expert fund manager who will pool investors' money and decide which companies and assets to invest in. The type of investments they'll make will depend on the aims and objectives of the specific fund (i.e. whether it's for income or growth – see below), and investors can either receive a form of income during the term of their investment or wait until they cash in the investment.
So basically, a stocks & shares ISA isn't a kind of investment in itself. Instead, it's a tax-efficient wrapper that goes around your investment to shield you from capital gains tax and income tax. However, it's worth remembering that your ISA pot would form part of your estate on death, so could be subject to inheritance tax at that stage.
The key difference between cash ISAs and investment/equity ISAs is that the cash version holds onto your cash and pays interest, while an equity ISA actively invests your money into different external funds or company shares for the potential of bigger returns. The returns come from a combination of an increase in the value of the fund due to increased share prices and dividend payments into the fund from the companies which the fund invests in.
A cash ISA is essentially the same as a traditional savings account, but without tax implications. With this form of tax-free saving, your deposits are held in a bank or building society account and are currently covered by the Financial Services Compensation Scheme (FSCS), at up to a maximum of £85,000 per person per individual banking licence, and your capital is guaranteed.
An equity ISA, however, is not a savings account and should be viewed more as an investment product. It's a higher risk home for your money with a chance you could lose some or all of your initial investment. It does however share the same level of protection under the FSCS, with investors being currently covered for up to £85,000.
It's also worth mentioning that unlike with a cash ISA, there are charges involved with equity ISAs. There will probably be charges for setting up the investment, for making a share trade, and, where applicable, charges for managing an investment fund. If you want to cash in your investment early, or transfer to another investment, there may be charges for this as well. That said, this is no different than if you were investing outside of an ISA.
In the year 2019/20 your ISA allowance is £20,000, which you can either split between a cash ISA, an Innovative Finance ISA and an equity ISA in any way you choose, or invest fully into an equity ISA (or one of the others). You can now also invest up to £4,000 of your annual allowance in a Lifetime ISA, and withdraw and replace funds you have invested in an ISA without the replacement funds being counted as part of your ISA allowance. However, this flexibility may not be appropriate for an equity ISA, as the money should be considered a longer-term investment.
You're now able to transfer any funds held in a stocks & shares ISA to a cash ISA, or vice versa, offering extra flexibility in how you choose to save.
Equity ISAs are more complex than cash versions. There are a number of different products you can choose from and different funds you can invest in, but by asking yourself the following simple questions, the process of making a decision becomes more straightforward:
Once you have answered these questions, it's time to think about the funds that are right for you.
Although a stocks & shares ISA can be a tax-efficient way to invest, it is an investment nonetheless. This means you would have to accept the risks associated with this. There are two main ways in which you could lose money:
Generally, investors have one of two goals – either to generate a regular income to supplement other payments (such as a pension), or to build a large value of investments for a particular use, i.e. a dream holiday or to send their child/grandchild to university.
Generating income can be achieved by investing in income funds (denoted by the term 'Inc'). The fund manager will usually invest in assets that provide interest or dividends which will then be passed on to you as an income payment from the fund, or alternatively you can have this income paid back into your investment to buy more of that fund.
Generating growth can be achieved by investing in growth funds (also known as accumulation funds, denoted by the term 'Acc'). The fund manager will usually invest in assets that are expected to increase in value, perhaps through an increase in a company's share price or an increase in the price of commodities.
Once you have an idea of the sort of fund that will help you achieve your goals, you can start to research suitable funds.
Good investment advice can be invaluable. Speaking to an independent financial adviser can help you make the most of your ISA allowance and find the investment that's right for you. A financial adviser is required to take full account of your circumstances before making a recommendation and will be able to explain the risks that you are taking.
Later on, if it transpires that the advice you were given was unsuitable, you would have cause to complain. If you arranged the investment yourself, without advice, you'd have less cause to complain if things went wrong.
Any investment comes with an element of risk, particularly those with the prospect of higher returns, and it's important for any potential investor to understand them.
Over time there could well be fluctuations in the value of an investment, with the total value and any income generated capable of going down as well as up, and as such in a volatile market some investors may get back less than they put in. Past performance should never be seen as an indicator of future returns.
Disclaimer: This is a basic guide to stocks & 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. 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.
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.