Stocks and Shares ISA Explained

You may have previously saved in a cash ISA and are now thinking about investing your money. A stocks and shares ISA can help you take that next step.

Hannah Smith Published on 23 December 2020. Last updated on 19 February 2021.
Stocks and Shares ISA Explained

A stocks and shares ISA is a tax-efficient way to invest for your future. While it’s not risk-free, it could give you a much better return than you’d get from a cash ISA if you invest for the long term.

What is a stocks and shares ISA?

A stocks and shares ISA (also called an investment ISA) is a type of savings account which lets you invest without ever paying tax on any income or capital gains your investments make, or on any interest your cash earns. If the stocks or funds in your ISA pay out dividends, you won’t have to pay tax on these either.

How do stocks and shares ISAs work?

You can hold individual shares, bonds, investment trusts and funds including passive index trackers and exchange-traded funds (ETFs) in a stocks and shares ISA. You can also put cash there.

You can put up to £20,000 in total into all the ISAs you hold in each tax year, this is your annual ISA allowance. You can split this amount however you like across the different ISA types. You also can have more than one investment ISA, but you can pay into only one each tax year.

You can transfer previous years’ cash ISAs into an investment ISA without it affecting your current allowance, and also the current tax year’s cash ISA money, as long as you transfer the whole amount. If you want to switch your stocks and shares ISA to a new provider, you can transfer it across without it affecting your ISA allowance for this year.

You can take money out of a stocks and shares (or indeed any) ISA, but it will still count as part of your year’s ISA allowance unless yours is a 'flexible' ISA. With a flexible ISA, you can take money out without it affecting your allowance, as long as you put the money back in the same tax year.

Pros and cons of a stocks and shares ISA

Pros

Aside from the tax benefits of ISAs, one of the key benefits of a stocks and shares ISA is the investment choice available. Whereas a cash ISAs can include just your savings in a bank or building society account as well as some National Savings & Investments products, in a stocks and shares ISA you can hold:

  • shares in companies
  • corporate or government bonds
  • unit trusts and investment funds

With a stocks and shares ISA you can deposit lump sums or invest monthly, to help you build up a regular investing habit. Your money is not locked away, meaning you can make withdrawals. But unless you also hold cash, you will need to sell investments to do so.

(One note: Your returns inside a stocks and shares ISA are likely to be greater if you leave your money alone to grow. For that reason, it makes sense to have money for emergencies in an easy-access savings account or easy-access cash ISA.)

Cons

Investing comes with the risk you will get back less money than you put in. How much risk there is with a stocks and shares ISA will depend on what investments you hold in it, how long you hold them for, and how stock markets perform over that time.

Fees are a key consideration in investing as well. With a stocks and shares ISA you might have to pay an administrative charge to the ISA provider, charges for your underlying investments (which go to the managers of the funds you hold), plus dealing costs when you buy or sell shares.

Types of stocks and shares ISAs

Confident investors could go for a do-it-yourself stocks and share ISA where you choose what to invest in and make the trades yourself.

Alternatively, you could choose a managed or ‘ready-made’ option, where you pay a professional to select the investments and manage your ISA for you. Many leading platforms offer these services, and while the portfolios are not bespoke to you, they are curated with your risk tolerance in mind. These companies typically use passive funds like index trackers or exchange-traded funds to keep costs down, and some also offer socially responsible investing options.

For a completely bespoke service you can consult an independent financial adviser (IFA), who, after a thorough assessment of your circumstances and attitude to risk, can recommend funds and set up and manage your ISA for you. This route can be more costly, however, particularly wise if you are only starting out and don’t have huge sums to invest.

» MORE: What is a financial advisor?

How to choose an investment ISA

Comparison websites and financial review sites are a good place to start researching your options. When you’re looking for the right stocks and shares ISA, you’ll need to consider what you want to invest in and how you want to manage your account.

To help you choose, look at the investment choices each provider offers, their fees and charges. Also, consider how user-friendly the platform’s website or app seems and how much guidance and hand holding it can offer you, if you aren’t confident making decisions.

How to open a stocks and shares ISA

Anyone over the age of 18 can have a stocks and shares ISA. You can open one easily online through your chosen ISA provider’s website. Lots of providers including banks, building societies, stockbrokers and investment platforms offer ISAs.

» MORE: Investment platforms explained

WARNING: We cannot tell you if any form of investing is right for you. Depending on your choice of investment your capital can be at risk and you may get back less than originally paid in

About the author:

Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more

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