Stocks & shares ISAs

If you’re willing to accept the ups and downs, stocks & shares ISAs could deliver higher returns than other savings. But what are stocks & shares ISAs and are they worth the risk?

If you’re willing to accept the ups and downs, stocks & shares ISAs could deliver higher returns than other savings. But what are stocks & shares ISAs and are they worth the risk?

Anelda Knoesen
From the Money team
minute read
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Posted 11 FEBRUARY 2021

What is a stocks & shares ISA?

A stocks & shares ISA, also known as an investment ISA, is an Individual Savings Account in which you can hold investments in a wide range of shares, funds, trusts and bonds. The benefit of a stocks & shares ISA is that you won’t have to pay tax on the money you earn from your investments.

Compare the Market doesn’t offer a stocks & shares ISA comparison service. We recommend you get independent financial advice before opening an account.

How do stocks & shares ISAs work?

You’ll need to choose a provider for your stocks & shares ISA, as well as the investments you want to put in it. The provider may offer a ready-made portfolio – a collection of investments – or you can choose to do some research and buy your own. There are various online trading websites, called ‘platforms’ you can do this through.

Another option is a so-called ‘robo-fund’ or ‘robo-advisor’. These are online services for choosing investments. Because they’re mainly automated, based on computer algorithms, fees can be low. You’re asked to fill in an online questionnaire, including questions about your attitude to risk, then a portfolio of investments is allocated to you. Some of these services offer cashback on your investment.

See our guide to stocks and shares.

Things you need to know about stocks and shares ISAs

A stocks & shares ISA should be seen as a medium to long-term investment. Once you open an account, most providers advise you should be prepared to invest for at least five years.

It’s important to know that stocks & shares ISAs can go up or down in value, so you might not get back what you originally invested.

There’s also a limit on the amount you can invest for each tax year – 6 April to 5 April. This is called an annual ISA allowance. Your allowance is the amount of money you can pay into your ISA in each tax year, not the total value of your investments.

The ISA allowance for the 2020/2021 tax year is £20,000 - the same as the year before. You can choose to invest a lump sum or add small amounts to your account over the course of the tax year. Just be aware that if you put your whole allowance in a stocks & shares ISA and it goes down in value, you won’t be able to top it up again until the next tax year.

You can also split the allowance across different ISAs if you have them – for example, you could put £10,000 in a stocks & shares ISA, £5,000 in a cash ISA and £5,000 in a lifetime ISA.

You can’t add money to two ISAs of the same type in the same tax year.

At the end of the tax year, if you haven’t invested your full ISA allowance, the remainder will expire – so you can’t roll it over into the next tax year.

Top tip

Stocks & shares ISAs can go up and down in value, so never invest more than you can afford to lose.

What happens to any income I make from a stocks & shares ISA?

That’s up to you. You can either withdraw the money, keep it as cash in your bank account or re-invest it into your ISA.

What are the risks of a stocks & shares ISA?

The value of investments you put into a stocks & shares ISA can go up and down, so the main risk is that you’ll get less back than you put in. This can also depend on the type of investments you’ve made.

Stocks & shares ISAs are most suitable if you can leave your money in them for at least five years. The idea is that, over time, your investments can ride out the ups and downs of the stock market. So if you think you’ll need quick access to cash, they’re not for you. An instant access cash ISA might be more suitable.

What are the benefits of a stocks & shares ISA? 

  • There’s the potential for higher returns than with savings accounts, but there’s also more risk involved. 
  • All the profits you could earn on your investments will be tax-free, including capital gains and dividends. 

Are there any charges on a stocks & shares ISA?

Fees can vary between providers, but could include:

  • An account/platform fee The platform is where your investments are held in one place. The charge for keeping your account there could be a flat fee or a percentage of the value of your investments held in that account.
  • Fund management charge A fee that fund managers charge for looking after your investments – also known as an annual management fee.
  • Trading fee Either a percentage or a flat fee every time you buy or sell shares on the investment platform.
  • Transfer fee Some providers charge a fee if you move your stocks & shares ISA to another provider.

When shopping around to find the best stocks & shares ISA for you, it’s a good idea to compare the different fees and charges for each platform.

Transferring a stocks & shares ISA 

If you want to move your stocks & shares ISA to another provider, you have to arrange a transfer rather than cashing in and reinvesting in a new ISA. Just be aware that while all providers must allow you to transfer out, they don’t have to accept a transfer in – so make sure your new provider accepts you first.

Is a stocks & shares ISA right for me?

A stocks & shares ISA could be an investment option if:

  • You don’t want to pay tax on any profits you make
  • You don’t need instant access to the money and are happy to invest it for at least five years
  • You accept the fact that the value of your shares can go up or down
  • You have enough savings put aside for rainy days, so you don’t have to dip into your investments

If you’re not sure if a stocks & shares ISA is right for you, we recommend speaking to an independent financial adviser before proceeding.

How do I open a stocks & shares ISA?

You can open a stocks & shares ISA:

  • through an ISA provider, such as your bank
  • directly through a fund manager
  • through a financial adviser
  • through an online share account

To be eligible for an ISA you need to be aged 18 or over and a UK resident.

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