Back in 1999, the UK government introduced Individual Savings Accounts (ISAs) to encourage more people to put money aside – and it worked! In 2018/19, 11.2 million ISA accounts, including 2.4 million Stocks and Shares ISAs, were paid into1. But despite this popularity, Stocks and Shares ISAs, also known as Investment ISAs, can remain a bit of a mystery to many savers. Here’s a quick guide to help you understand how they work.
A Stocks and Shares ISA allows you to invest in a tax-efficient way
The main benefit of having a Stocks and Shares ISA is that it lets you invest tax-efficiently. This means you don’t need to pay tax on any returns you make, and you’ll be able to keep more of your money – what’s not to love?
Now with investing, there’s a risk you could end up with less than you initially put in - and holding a Stocks and Shares ISA doesn’t remove this risk. However, since returns aren’t tied to any interest rates, there’s also a chance for higher returns. In fact, over the long-term, the odds of making a gain tend to increase. For instance, people who invested in the FTSE 100 for any 10-year period between 1984 and 2020 have had an 89% chance of making positive return2 – it’s interesting to note that this timeframe includes a number of market crashes, such as Black Monday and the Global Financial Crisis of 2008.
A Stocks and Shares ISA comes with an annual allowance
One thing to be aware of is that there’s an annual ISA allowance – it’s currently set at £20,000 (subject to change), and it’s the maximum you can put in your ISA each tax year. The way you use it is completely up to you. You can either put it all in your Stocks and Shares ISA or your Cash ISA, or you could split it between the two accounts.
Each tax year, you have until midnight on the 5th April to use your full ISA allowance, if you don’t, then it’ll be lost forever. We’re not saying you should absolutely put £20,000 in an ISA every year - although if you can, there’s no harm in doing it. What we’re saying is that it’s a good idea to make the most of your allowance and put some money aside, even if it’s only £20 a month. If you want to build a decent nest egg for the future, then investing little and often could help, especially with a bit of patience.
Investing isn’t just about how much you’re putting aside, it’s also about how long you’re willing to stay invested for. And typically, the longer, the better, as your money will have more time to potentially grow and benefit from the power of compounding – when your re-invested profits (dividends and interests) work in your favour and start generating further profits. Let’s take an example. Say you put £20 a month in a Stocks and Shares ISA. After 20 years, you could end up with £6,9123 – which is great! But now add five extra years and you could get £9,632, which is an extra £2,7204.
You can transfer a Stocks and Shares from one provider to another
If you’re not satisfied with the service you get from your ISA provider, you have the possibility to move your account somewhere else. But before you transfer your Stocks and Shares ISA, there are a few things you need to know:
- ISA transfers allow you to move your money from one provider to another without losing your ISA tax benefits.
- If you’re transferring an ISA that you’ve opened, or paid into, in the current tax year, you’ll have to move the full amount.
- If you’re transferring an ISA opened, or paid into, in previous tax year, it won’t impact your current ISA allowance and you can move as much as you want.
- You can transfer any type of ISA into another type – for instance, if you have a Cash ISA and want to move it into a Stocks and Shares ISA, it’s perfectly possible. However, there are two exceptions here:
- With an Innovative Finance ISA, you are able to transfer the cash out of this type of ISA but may not be able to transfer other investments.
- If you choose to transfer a Lifetime ISA to Stocks and Shares ISA, you’ll lose your 25% bonus.
- Not all ISAs allow transfers in, but all must allow transfers out. Make sure you check this when looking at other providers.
- Some providers will charge a penalty for transferring out before a certain date. Again, make sure to check this before you move your account anywhere.
- To complete your ISA transfer, you’ll need to use and complete the official transfer-in form – this will be given to you by your new provider. Do not withdraw this money to move it or your account will lose its tax-efficient status.
If you want to find the best Stocks and Shares ISA, you’ll need to shop around and compare the different services out there. This includes looking at their performance, their fees, any features you could benefit from, and their customers’ reviews. Once you’ve found the perfect match, don’t forget to use the official ISA transfer form and enjoy the new adventure.
It’s possible to pay into an Ethical Stocks and Shares ISA
Did you know you could invest without sacrificing your values? With an Ethical Stocks and Shares ISA, you get to put your money to work and to good use. But how does it work in practice? Well, it depends on your ISA provider. At Wealthify, we use ethical funds – think of them as hampers full of sustainable investments. And most of these funds will carry out negative screenings where harmful activities and sectors are removed – here we’re talking about controversial activities such as weapon manufacturing and tobacco.
Many ethical funds we use will also perform positive screenings and seek out companies committed to doing their part for the environment and society. Typically, funds will assess and score companies based on how they’re impacting the environment and society as a whole. The better companies are doing in these areas, the more likely they are to be included in the fund. But it’s not just about finding best-of-breed organisations as some funds will also include companies that are working hard to improve their policies and practices. The investment funds we use to build your Ethical Stocks and Shares ISA are actively managed, meaning companies are reviewed on a regular basis to ensure high standards are maintained.
Opening a Stocks and Shares ISA is easy
With robo-investing platforms, like Wealthify, opening a Stocks and Shares ISA has never been easier – in fact, you can get started in just a few taps via our investment app. Simply choose how much you want to invest, select the investment risk you’re most comfortable with, and make your ISA ethical is you want to. Our team of experts will do the investing for you and make sure your Plan remains on track with your investment style and goals.
2: Data from Bloomberg
3: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £5,304. If markets perform better, your return could be £9,085. Values correct as of 24/11/20.
4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £7,215. If markets perform better, your return could be £13,538. Values correct as of 24/11/20.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.