A stocks and shares ISA is a type of Individual Savings Account (ISA) offering tax advantages for UK residents. Although it is called a savings account, stocks and shares ISAs are investments, not savings. Investing is a riskier option than keeping your savings in cash ISAs, but the returns could be higher on the longer term.
You can invest all or part of your annual ISA allowance of £20,000 into a stocks and shares ISA. Investment options include shares of individual companies, corporate and government bonds, trust and investment funds, or life insurance policies.
Before investing, think about how comfortable you are with taking and managing risk. Cash ISAs are low risk and low return, while stocks and shares ISAs might offer a higher return, but are also more risky. The value of your investment can go up and down depending on how well your assets perform on the market.
If you are in it for the long haul, it is more likely that your investments will ride out the waves and increase the value of your investment. However, returns are never guaranteed with shares and stocks ISAs. If you can, it is best to invest at the start of the tax year, so you will benefit from a full year’s tax-free interests.
You can open only one stocks and shares ISA with one ISA provider during the same tax year. The tax-free benefits remain until you hold onto your account: you don’t pay taxes on dividends or interests earned, and you don’t pay capital gains tax on your profit. Most providers charge a fee for managing your stocks and shares ISA for you, and some providers may charge you to change your investments or withdraw money.
When choosing a stocks and shares ISA, you can decide to invest a lump sum or make monthly contributions, which can be as low as £25. The advantage of investing a lump sum is that you get your money working from the start, and give it longer time to grow. However, it is also riskier than monthly contributions. If your investments shrink, it affects all of your money. With regular contributions you can better manage market volatility by buying more units when the value of your investments are down, making you better placed to benefit should the value of the investment rise again.
Your investments will have some level of security, as the Financial Services Compensation Scheme (FSCS) covers up to £85,000 of your ISA investments if they are held at a bank or provider that is under the supervision of the UK regulator and your provider goes bust.