Suppose your savings aren’t growing at the rate you want in a standard account. In that case, you might be tempted to consider a more adventurous alternative. 

A Stocks and Shares ISA is a tax-efficient savings account that can put your money into a wide range of investments. These might include individual shares and investment funds and trusts, government and corporate bonds, or other areas. If the stocks and shares soar, your savings could increase, too. If they crash, you could lose money. The potential payoff of Stocks and Shares ISAs come with increased risk. Still, it can be a wise investment if it suits your individual circumstances.    

What is an ISA?

If you’re new to the world of savings, ISAs may seem a little confusing. These are actually a straightforward type of savings account and relatively easy to understand. ISA stands for Individual Savings Account. An ISA is basically a type of savings account with tax-free returns – meaning you don’t pay tax on the interest you make. 

Everyone in the UK has a personal allowance set by the government. This is the amount you can save each year before you start paying tax. The current personal budget for the tax year is £20,000, which means you can pay up to this amount into an ISA without paying tax on any interest you gain. 

The tax year runs from April to April each year. It’s essential to understand the rules around ISA allowances to make the most out of yours. 

ISAs are popular, as they allow you to save and earn interest tax-free and don’t need to be declared on your tax return. There are several types, as well as special ISAs for young people called Junior ISAs. The most popular types are Cash ISAs and Stocks and Shares ISAs; you can find out much more in our informative what is an ISA guide.

What is a Stocks and Shares ISA?

Stocks and Shares ISAs are also known as investment ISAs. They actively invest your money in the stock market, so the return is directly linked to the success or failure of the investment. You could earn a lot more than a standard cash ISA – which is just a tax-free version of a regular savings account. 

With a Stocks and Shares ISA, you make more money, but you could also lose money. However, the potential to increase your savings with stocks and shares is significantly greater if things go well.

Every Stocks and Shares ISA is different. Usually, you can choose where your money is placed. Or, if you don’t know anything about the stock market, you can leave those decisions to the investment fund manager. Stocks and Shares ISA providers will usually publish their performance from previous years. However, that is not always an indicator of future growth.

Unlike Cash ISAs, which are usually free, most investment ISAs will charge you a monthly or annual fee. We’ll talk more about the costs and charges below.

What can you invest in?

Stocks and Shares ISAs can include a wide range of investments, such as: 

  • Individual stocks and shares

  • Corporate and government bonds

  • Unit trusts

  • Investment trusts

  • Exchange-traded funds

  • Open-Ended Investment Companies (OEICs)

It is generally recommended to diversify what you invest in – in other words, different industries, regions, and with varying managers – to spread the risk. Essentially, try not to put all your eggs in one basket. 

How does a Stocks and Shares ISA work?

We’ve already talked about your personal ISA allowance and how this figure has been set at £20,000. This means you can invest up to this amount in a Stocks and Shares ISA without paying dividends, capital gains, or tax on any income or profits. This is the significant advantage and selling point of Stocks and Shares ISA, not to mention the potential for making more money from your savings if you make wise investments. But how does it work exactly? Here is a quick rundown of the basics:

  • The first step is to choose which provider to open a Stocks and Shares ISA with 

  • You can then either choose investments yourself – the DIY option which should only be used by those with sound financial knowledge – or go with a fund with a manager who decides for you

  • It’s essential to understand the risk of stocks and shares and to research the costs and charges involved

  • You can make a lump sum investment at the start of the tax year, regular investments over 12 months, or sporadic payments whenever suits you

  • It’s worth remembering that your annual ISA allowance expires at the end of each tax year and cannot be rolled over; any unused allowance will be lost

  • The value of your investments can go up or down, but any increase is tax-free

  • You can access and withdraw money whenever you want to; however, stocks and shares are generally considered as medium to long term investments, and it is recommended you give your account at least 5 years to see how it performs

  • If your investment is not performing well after 5 years, you can transfer your Stocks and Shares ISA to another provider at any time; just watch out for exit fees 

Stocks and Shares are often an umbrella term, but they can encompass several different things. For example: 

  • Shares – a share of the value of an individual company. Businesses sell shares to investors to raise money

  • Bonds – a loan to a company or government in exchange for payments, known as the yield, which come as bond dividends or interest

  • Funds – these can be shares or bonds from several companies pooled into 1 investment to spread the risk. There are active funds, chosen by a specialist fund manager, and passive funds, which follow the performance of the top 100 companies in the UK; this is the FTSE 100, which you might have heard about on the news  

Benefits of a Stocks and Shares ISA

The main benefits of a Stocks and Shares ISA are: 

  • The opportunity to increase your savings if you make successful investments

  • Tax-free returns on your investments and other tax benefits

An ISAs is sometimes described as a wrapper because of the way it protects your savings. This can also refer to wrapping up both your savings and investments to keep them tax-free. The tax benefits are one of the main advantages of a Stocks and Shares ISA, as well as the potential to grow your savings through lucrative investments.  

How do I open a Stocks and Shares ISA? 

Stocks and Shares ISAs are available from a wide range of providers, including banks and building societies. The places you can take out an ISA from include: 

  • Financial institutions (like banks and building societies)

  • Direct ISA providers 

  • Investment fund managers

  • Discount brokers

  • Online share accounts and stockbrokers

  • Independent financial advisors and planners

One of the most cost-effective and increasingly popular ways to set up a Stocks and Shares ISA is through an investment platform or fund supermarket. Like a supermarket, these are a space to buy products, or in this case, purchase investments.   

What is the cost of investing in a Stocks and Shares ISA?

Costs can differ between platforms and providers, so it’s vital to do your research before investing. These costs can take the form of flat fees, a percentage of your portfolio, or a combination of the two. 

You’ll usually pay multiple costs – one to the investment platform and another to the fund manager. Still, there are other fees and charges to be aware of:

  • Account fee or platform charge – this could be a flat fee or a percentage, but is essentially the cost of using the platform or fund supermarket to make investments

  • Fund manager fees – this is the charge by the manager of the fund and usually varies between 0.05% to 1%+ per fund

  • The cost of selling and buying shares or funds – this is the cost of your investments. If you buy shares and funds for the long-term, you may only pay out once. Suppose you’re an active trader and plan on buying and selling regularly to make money. In that case, you’ll want a provider that charges low trading fees

  • Exit charge or transfer-out payment – the cost of moving to another provider

Understanding the costs of a Stocks and Shares ISA is vital because there can be a significant difference between providers. The charges are often fixed, regardless of how your investment performs. Look out for any hidden charges or exit fees for transferring your ISA or changing provider too.

As a general rule, if you regularly buy and sell investments, it’s recommended you choose a platform with low or no fees for trading.

Is a Stocks and Shares ISA suitable for me?

While Stocks and Shares ISAs have the potential to make more money from your savings, they are not suitable for everyone. Whether they are right for you comes down to several factors. For instance:

  • Are you 18 or over?

  • Do you live in the UK for tax purposes?

  • Do you understand the risks of investing in stocks and shares?

  • What’s your appetite for risk? The riskier the investment, the higher the return, but not everyone is comfortable putting their savings on the line with no guarantees

  • Can you afford to invest for at least 5 years without needing the money in that time?

  • Do you have separate savings for emergencies, so you do not need to use your investments?

  • Have you paid off any high-interest debt? It’s recommended to do this before starting a savings account

By answering these questions, you can start to understand whether a Stocks and Shares ISA fits your circumstances.

Best junior Stocks and Shares ISA

There are specific ISA products designed for children and young people. In particular, these are for parents and guardians who want to put money aside for their children and keep that cash locked away until the child turns 18. 

These accounts are called Junior ISAs. Like adult ISAs, you can get Junior cash ISAs and Junior Stocks and Shares ISAs. They work in much the same way as their adult equivalent, except that a child’s allowance is set at £9,000, and they cannot withdraw money until their 18th birthday. 

Best performing Stocks and Shares ISA

There are many Stocks and Shares ISA providers out there and choosing between them might feel like a minefield. Your instinct might be to select the best performing provider from the previous tax year. Still, past performance does not always mean future success when it comes to the stock market. 

In the UK, investment providers like Wealthify, Nutmeg, Vanguard, Moneyfarm, and several others are rated as some of the best-performing Stocks and Shares ISAs. However, it’s essential to do research when planning to begin an investment, as the market can change quickly. For example, in 2020, the FTSE 100 fell 14.3% - the most significant fall since 2008. 

Many consumers also tend to feel safer with more established banks and building societies, but this can vary from person to person.

Beyond a product being the top performing, some considerations might make certain products and portfolios more suitable for your particular circumstances. These include the cost, minimum investment, online access and management, and the level of risk. As ever, it’s less about the best Stocks and Shares ISA out there and more about the right one for you. 

Stocks and Shares ISA comparison

It’s essential to shop around and compare different Stocks and Shares ISAs before deciding. When it comes to performance, you can compare the percentage return over 12 months after deducting any fees. 

Other key comparison points include fees and charges, including any exit fees, if you decide to move your savings elsewhere. It’s worth monitoring your Stocks and Shares ISA to make sure you’re still getting the best deal. 

You can also make a list of providers recommended by independent consumer and financial groups to discover those with a good track record. This might include consistent returns, excellent customer service, and other qualities that are important to you.

Regardless of how much research you do and the data you compare, it’s important to remember, there are no guarantees for investing. Unlike traditional savings accounts with more modest returns, there is always a risk. It’s vital to understand this before putting your savings on the line.

Can you transfer a Stocks and Shares ISA?

Yes, you can switch providers to a different Stocks and Shares ISA, although there may be exit fees. It’s also possible to move funds from a Cash ISA into Stocks and Shares. You can also do the reverse if you’ve decided you don’t want to take any more risks with your savings. In this case, you might prefer to transfer your stocks and shares into a cash ISA.

What happens to a Stocks and Shares ISA if you die?

If you die, your Stocks and Shares ISA will become a Continuing ISA. This will remain open for a limited time until the executor of your estate closes it. Since April 2015, a surviving spouse or civil partner can inherit a Stocks and Shares ISA without losing the tax benefits.

How safe are Stocks and Shares ISAs?

Stocks and Shares ISAs in the UK are covered by the Financial Services Compensation Scheme (FSCS). If your ISA provider fails to return your money when you want it, the FSCS can award compensation up to £85,000. 

With any savings or investment, it’s always a good idea to ensure your provider is authorised so that your money will be protected.

If you have savings over £85,000, it could be a good idea to divide them into several savings accounts, each coming under that amount. This way, they will individually benefit from FSCS protection.

Making more from your savings with a Stocks and Shares ISA

You don’t need to be a professional trader to make money from investments. A Stocks and Shares ISA could help you make more money from your savings than a Cash ISA, although there is a risk that your investment could decrease. 

If you’re comfortable with the risk and are willing to invest over a few years without withdrawing your savings, a Stocks and Shares ISA could be the savings account for you and a good investment for the future.

3 June 2021