Stocks & shares ISAs

• 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. 

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. The important thing to know is that you won’t have to pay any income tax, dividend tax or capital gains tax on any of your earnings, as long as they’re part of your stocks and shares ISA.

The main difference between a cash ISA and a stocks and shares ISA, is that they’re a different type of investment. While they’re both ISAs, a cash ISA is more like a traditional savings account, a place to store your money and watch it grow with a certain level of interest. While these interest rates may vary, it ensures guaranteed growth. A stocks and shares ISA however, relies on the stock market to see a return. The account provider will be helping you manage your money and invest it in various shares, bonds and trusts, but those investments are as vulnerable as anything else on the stock market. You could see growth or decline. While stocks and shares ISAs are considered higher risk than a standard cash ISA, the rewards on offer can be greater, depending on the performance of your investments.

While you can go directly through the banks or building societies, the cheapest way to open a stocks and shares ISA is usually through an online platform. This way, you can choose between different stocks and shares ISA providers, based on the fees they may charge you for the account and fund management. This can make finding the “cheapest” one a bit tricky, as you’re being charge for both. This could also be a flat fee or percentage based. Percentage based fees are then more expensive for people investing larger amounts, so these people should look for flat-fee accounts. So, make sure you’re comparing both the platform/account fees, as well as the fund management, because both can make a big difference. It’s the right combination that you’ll need.

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.

If your financial situation changes, or if you just want to take less of a risk, you can transfer the money from a stocks and shares ISA into a cash ISA. Like with any other ISA transfer though, don’t just withdraw your money and then open a new cash ISA. If you do this, you’ll lose all the tax benefits. Instead, you’ll want to contact your ISA provider and let them know you want to make the switch. You’ll need to fill out an ISA transfer form, and, if you’re moving to a new ISA provider, you might need to pay a fee for closing you’re account. Once you’ve done your bit, the transfer should go through in no more than a few weeks.

If you’re looking to do some research to try and make the best decisions, there are plenty of free sites that can help you break down what you’ll need to know, before making your first investment. Here are a couple of examples which have lots of useful information and guides that you can use:

• Hargreaves Lansdown – with advice specifically designed for first-time investors, you can start with the basics or throw yourself in to the juicy stuff. You’ll also find video guides and checklists, all to help you understand how stocks and shares ISAs work, and how to make the most of them.
• Interactive Investor – a great tool for DIY investment, Interactive Investor can help you choose your investments and answer many of the common questions associated with stocks and shares ISAs.

To be brief, they don’t get taxed. Firstly, you won’t need to pay any income tax on the money you earn through your investments, so long as your money is secured in your ISA. Secondly, any dividends you receive from your shares will also be exempt from tax, even if they go beyond the usual dividend allowance you’d expect, outside of an ISA. Finally, if you sell off any assets (shares etc.) from your ISA account, you won’t be subject to capital gains tax either, which means all three of these tax benefits make a stocks and shares ISA very tax efficient.

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.

Stocks and shares ISAs are a bigger risk than other types of ISA, because they involve investment. Any form of investment can be a risk, because you can’t be guaranteed that the value of the shares your ISA is invested in will see a return or increase in value. So, while the ISA account itself is relatively safe, the stocks and shares are open to the same risks as any other investment. So, if you’re looking for a safer investment, a cash ISA may be a better choice for you.

The stocks and shares ISA itself will, however, be protected by the Financial Services Compensation Scheme. This means, if your stocks and shares ISA provider were to collapse, your account would be protected up to the value of £85,000. Anything more than this would be lost. So, if you’re looking to invest more than this, you may want to spread your money between different account providers.