Setting up a stocks and shares ISA can feel intimidating and complicated – but if it’s something you are considering, this edition of our Savings Guide should help.
We’ve teamed up with Grace Whalley, a chartered financial planner at The Private Office, about how to get started, what to consider and what you should be doing if you already have one…
A quick introduction
Everyone in the UK aged 18 or older is allowed to save £20,000 a year in an ISA, tax-free.
You can use all or part of this allowance to invest your money in funds, bonds and shares in companies by using a stocks and shares ISA.
The idea is that any returns you make are protected from income tax and capital gains tax.
“This is particularly important now, as allowances like the dividend and capital gains tax thresholds have been reduced,” said Whalley.
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Unlike a cash ISA, which is simply a tax-free savings account, a stocks and shares ISA involves investing in financial markets, meaning the value of your money can go up and down.
But Whalley points out that unless you sell when it’s down, it is possible to wait for a recovery.
Who are stocks and shares ISAs suited to?
People who are comfortable taking on some risk, and have medium to long-term goals for their savings, can benefit from a stocks and shares ISA, Whalley said.
They are particularly appropriate for people who can commit to investing for at least five years.
This is because it allows time for markets to recover from any short-term dips.
If you are looking for short-term gains, a stocks and shares ISA might not be the best option.
You do not need to be an experienced investor to open an account – many providers offer simple, diversified, pre-made portfolios that can match the level of risk you would like to take.
Thinking about opening one? Consider these things first
Before opening a stocks and shares ISA, Whalley said you should:
“Unlike cash savings, investments can fluctuate in value, and if you are forced to sell at the wrong time, you may get back less than you originally invested,” she said.
“For those new to investing, this volatility can be unsettling, especially if you’re used to the stability of savings accounts.
“That’s why building a diversified portfolio (having a mix of different assets) that aligns with your risk tolerance and investment time horizon is essential.”
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For example, long-term investors with a higher risk appetite might have more of their money in equities (shares), while more cautious or short-term investors may prefer a mix that includes bonds, absolute return funds or commodities to help protect against downside risk.
It’s also important to check if the provider you’re considering charges any fees.
Most providers will apply a platform or service fee for managing your account. Some may also add a management charge or dealing fees each time you buy or sell assets.
There could also be withdrawal or exit fees taken when you take your money out.
“These fees can vary significantly between providers and can have a meaningful impact on your returns over time, so it’s important to compare costs before choosing where to invest,” Whalley added.
Already got one? Here are 6 top tips
1. Maintain a cash buffer
You can do this either in a cash ISA or an easy access savings account.
“This helps ensure you’re not forced to sell investments during market downturns, which could lock in losses,” Whalley said.
2. Review your portfolio twice a month
While it’s important to monitor your investments, checking them daily can lead to emotional decision-making. Instead, aim to review your portfolio once or twice a month to ensure it still aligns with your goals and risk profile.
“If your circumstances or objectives change, you may want to adjust your portfolio to increase or decrease the risk rather than withdraw your money entirely, effectively starting all over again,” she added.
3. Remember your flexible option
You also have the flexibility to transfer your ISA to another provider if you find one offering better service or lower fees and lots of providers now offer a flexible ISA facility.
A flexible ISA allows you to re-contribute the amount you have withdrawn within the same tax year without affecting your ISA allowance, which helps with planning and budgeting. So, if you need some cash in the short term but are in a position to replace it back into the ISA within the same tax year, this flexible ISA rule is valuable.
4. Don’t withdraw and reinvest
When looking to transfer between providers, it’s crucial to use the official ISA transfer process rather than withdrawing the money yourself. This ensures you retain the tax advantages of your ISA.
“If you withdraw the funds and reinvest them manually, it will count as a new subscription and could exceed your annual allowance, resulting in the loss of the tax-free wrapper on any excess amount,” she warned.
The transfer process is straightforward: you simply open a new ISA with your chosen provider, complete their transfer form, and they’ll handle the rest. You can transfer both cash and stocks and shares ISAs, and you’re free to move between types.
5. Multi-asset managed portfolios are a great option
“These portfolios are designed to match different risk levels and offer diversification across asset classes and geographic regions, whilst offering an actively managed service,” she explained.
6. Time in the market – not timing the market
While it’s tempting to react to short-term fluctuations, staying invested and focused on your long-term goals is usually the best strategy.
