A beginner’s guide to Stocks and Shares ISAs

Thursday, 15 September 2016
In today’s uncertain world it is increasingly important to save money for later; for a house, a new car, or just in case your job disappears out from under you. ISAs (Individual Savings Accounts) are a popular option by which to save and through interest increase your money, without having to pay taxes on those savings.

Most people will be familiar with Cash ISAs, accounts you can comfortably leave your money in for a period of at least a year, and know exactly how much money you will have added at the end of your term by calculating your interest. Stocks and Shares ISAs, also known as Investment or Equity ISAs, don’t have this same stability, but can give you much greater rewards. If you play your cards right.

Unlike the name suggests, a Stocks and Shares ISA will not require you to personally fight for your savings on the stock exchange floor or become a stockbroker in your spare time. Depending on what you choose to invest your money in, however, a Stocks and Shares ISA can be a lot more exciting than a regular Cash ISA. For this reason and due to the extra risks, you must be 18 or over to be able to put your money into a Stocks and Shares ISA (compared to 16 or over for Cash ISAs).

There are three types of investments you can choose from for a Stocks and Shares ISA: shares, unit trusts or investment funds, and corporate or government bonds. By buying shares in a company with your savings, you trust that they will keep making a profit, so that you may benefit from their profit increases. By trusting your savings to a fund or unit trust, you are asking a fund manager to pool your resources with other people’s savings and then hopefully increase it in value through a series of smart investments. Buying bonds essentially means lending your money to a company or the government (note that government bonds are also called gilts due to their secure nature). As long as the company remains solvent, they will be able to pay you back your savings/loan (plus hopefully some pre-arranged fixed interest) after the agreed term has ended.

With shares and bonds, it may be easy to become invested in the company you are supporting, especially if you get invited to shareholder meetings or other social events. That doesn’t mean you should choose an investment for subjective reasons. Most companies that offer Stocks and Shares ISAs also offer research and comparison tools and/or professional advice, to ensure that you choose the investment that is most likely to give you the gain in savings you are looking for.

As you can tell, the different types of Stocks and Shares ISAs come with different amounts of risk. Unlike with a Cash ISA, it is entirely possible that your savings will decrease over time, if for example the company you’ve invested in makes a loss, or a fund manager makes a wrong decision. For this reason, it is important above all else not to panic. While it can be tempting to keep checking your ISA to see how it’s doing, you are generally advised to give it at least five years to make a profit. If you panic and retrieve your money as soon as it decreases below your initial investment, you don’t get the chance to possibly see it increase again later, and by a greater amount.

So how does opening a Stocks and Shares ISA work? It’s not that different from opening a Cash ISA. First, you have to do your research and pick the right option for your needs. Our Best Buys page can be a good place to start. Different Stocks and Shares ISAs provide different levels of flexibility in letting you choose what funds to invest your savings in, and are usually open about the levels of risk and reward attached to each. If you would like a lot of involvement in your ISA, a company with more diversified investment opportunities could be right for you. If you don’t want to have to think about your Stocks and Shares ISA for at least five years, a reputable company that offers to take care of your savings for you is probably the one you’re after. Once you’ve chosen, opening a Stocks and Shares ISA can be as easy as filling in an online form; a matter of minutes.

Are you still not sure if you should open a Stocks and Shares ISA? If you’re looking to have some tax-free savings put away for only a short while (i.e. less than five years), a Stocks and Shares ISA is not the option for you. Instead, we suggest that you take a look at the Moneyfacts Cash ISA pages to find the best flexible deal for you. If on the other hand you are comfortable leaving your savings alone for an extended period of time, are not afraid of some risk, and would like to see your savings grow in the long term - as a retirement or rainy-day fund for instance – a Stocks and Shares ISA can provide you with more rainy-day money than a Cash ISA, without having to worry about paying (or even reporting) taxes on it.

Note that the government puts a limit on the amount of money you can transfer into or add to an ISA each tax year. For the 2016-2017 tax year (the next tax year starts in April), the allowance stands at £15,240. Anything over this amount will be subject to taxation.