What is a Stocks and Shares ISA?
A Stocks and Shares ISA is a savings account that you can hold funds, shares and other assets in. As it is an ISA, it also has several tax benefits that mean your investments are always tax-free.
What are the tax benefits of a Stocks and Shares ISA?
There are three main tax benefits of a Stocks and Shares ISA to be aware of, and even a few forms of tax you will not be immune from with an ISA.
- Capital Gains Tax (CGT) - You will never have to pay CGT on the growth that your investments make in an ISA
- Income and Dividends Tax – Any income or dividends generated by assets within your ISA are 100% tax-free
- Stamp Duty Reserve Tax – Even within an ISA, any electronic purchases of individual shares will be subject to a 0.5% government stamp duty tax
- Inheritance Tax – In the event of your death, the beneficiaries of your estate could still be required to pay Inheritance Tax on the value of your ISA
How is a Stocks and Shares ISA different to a Cash ISA?
In a Cash ISA, you can only hold cash. Providers can offer you variable or fixed interest rates for your investment, but you will not be able to hold and stocks and shares within your account.
While Cash ISAs can get you a guaranteed return on your investment, interest rates are so low currently that the options available are not attractive to many investors.
The returns in a Stocks and Shares ISA are potentially limitless depending on the underlying investments you hold within it. However, remember that your investments can go down in value as well as up, and so you may need to wait out short term losses to benefit from long term gains.
How can I find the best Stocks & Shares ISA?
The best stock ISA for you will depend on many factors, all of which we will discuss in this guide:
- What investments can it hold?
- What are the charges?
- What investment research does the provider offer?
- How good is their customer service?
- Is the account easy to use?
The best way to compare Stocks and Shares ISA accounts is to research the above factors and think about which ones are important to you.
The best stock ISA for one person may be different to the best ISA for you, so make sure you apply all these factors to your situation and preferences.
What is the best performing Stocks and Shares ISA?
The best performing Stocks and Shares ISA depends predominantly on the underlying investments that you hold within your ISA account. However, other factors include the ongoing charges that you pay on your account that will eat into your gains.
If you have an investment in mind that you think will have the best returns, you need to make sure your ISA provider can hold it.
What investments can a Stocks and Shares ISA hold?
There is a multitude of investments you can hold in a stock ISA. If you already know what you want to invest in within your ISA, then you should look at what providers are able to hold your particular portfolio. However, if you have not yet decided, here is a list of popular investments that can be held in an ISA.
- Unit Trusts
- Investment Trusts
- Tracker Funds
- Bonds & Gilts
- Ready-Made Portfolios
An investment platform where you pick your investments yourself will usually facilitate most of these types of investments.
However, some ISA providers can only hold OEICs and Unit Trusts, so it is worth checking this before investing in case you want to buy a different product.
How does a Stocks and Shares ISA work?
First, you will need to add money to your ISA account. This is usually done via a debit card payment, but you can also make contributions via Direct Debit to save up monthly.
Once you have added your funds, you need to decide on the investments you want to hold in your Stocks and Shares ISA.
If you have a lot of investing experience, you may wish to select individual shares to purchase in the hope that they experience growth over the long term and potentially pay out dividends too.
Funds and Unit Trusts
If you have limited experience, you could consider buying a selection of OEICs, Unit Trusts and Investment Trusts in a range of sectors and countries that suitably diversify your portfolio.
These investments are managed by fund managers who decide on the underlying companies to invest in. All you need to do is pick one fund for a particular sector, and you will get exposure to lots of different companies in this market through the expertise of a fund manager.
What is the difference between Income and Accumulation Funds?
With funds, the dividends that the underlying companies pay are either paid out to investors or reinvested automatically within the fund.
If the fund you buy ends with (Inc), this is short for ‘income’, and it means that the income generated by the fund will be paid out to your stock ISA’s cash account. From there, you can withdraw it as a form of personal income and know that it is tax-free due to it originating from an ISA account.
If the fund ends with (Acc), this stands for ‘Accumulation’ and means that the income will be automatically reinvested into the fund by the fund manager.
What is a Ready-Made Stocks and Shares ISA?
If picking your shares or funds yourself is too daunting, then you could choose an ISA provider that offers ready-made ISA portfolios.
These are usually made up of funds and Investment Trusts but are hand-picked by professional portfolio managers to fit specific risk profiles.
They will not be able to guarantee a specific Stocks and Shares ISA returns rate but will build a portfolio based on their expertise to try and get the best returns at the appropriate level of risk.
Risk profiles range from Cautious and Defensive to Balanced and Adventurous, and the right one for you will depend on your attitude to risk and your personal circumstances.
A higher-risk portfolio will typically have a greater level of volatility over the short term, but a greater potential for returns over the longer term.
What are the charges for a Stocks and Shares ISA?
The return on your ISA will be affected by the charges that you pay within it. The main ongoing charges to be aware of when you are selecting your Stocks and Shares ISA are the following:
- ISA Provider’s AMC (Annual Management Charge)
Your ISA provider will charge an ongoing percentage against your portfolio which may vary depending on what investments you hold and how much your total portfolio is worth.
- Fund Manager’s Ongoing Charge (OCF or TER)
If you invest in funds or Investment Trusts, the fund managers will take an ongoing charge from within the investment. Unlike your ISA providers’ charges, these will not be deducted from your ISA account’s cash balance but will be reflected in the value of the fund itself. You will need to check the fund’s fact sheet to establish what the specific fund charge is.
- Portfolio Manager’s Charge (if using a ready-made portfolio)
If you invest in a ready-made or bespoke portfolio, then the portfolio manager will also take an ongoing charge for putting together and monitoring the portfolio.
You will also likely be paying your ISA provider’s charges and the ongoing fund charges for the underlying investments within your ready-made portfolio.
Some other, ad hoc fees to be aware of are:
- Dealing fees
- Exit or transfer out fees
- Stamp Duty Reserve Tax on share purchases
It is important to always keep in mind that the more you pay in fees, the more of your ISA performance you will be sacrificing. That being said, if your portfolio is outperforming other, cheaper investments, then it could certainly be worth it in the long run.
What are the other advantages of Stocks and Shares ISAs?
Provider Research and Insight
Another critical factor to be aware of when comparing Stocks and Shares ISA accounts is the amount of unique investment research and insight they provide to account holders.
Research from professionals in the industry can prove very valuable, particularly if you are intending to pick your funds or shares yourself but do not already have a portfolio planned out.
Many providers will compile lists of their favourite or the most popular funds in a particular sector, for example, and although they cannot tell you what to invest in, it can be beneficial in understanding what kind of investments are trusted by your ISA provider.
It is worth checking what content is available that is exclusively for account holders, and whether it is a factor in your choice of stock ISA provider.
Is customer service Important for a Stocks and Shares ISA?
If you have a problem with your account, you will want to get hold of somebody and resolve your query as soon as possible.
Some problems or queries that you could face with your Stocks and Shares ISA account include the following:
- You have been locked out of your account and need a password reset
- A stock you own goes into liquidation or ceases trading
- You have a question about a transaction on your account, such as a fee you have been charged
- You need an update on a transfer or a withdrawal
- You are concerned about a security breach on your account
In this type of situation, being able to contact an agent on the phone or via live chat is paramount, particularly if the security of your account is at risk.
Factoring in the response times and professionalism of your provider's customer service or helpdesk team is worth considering.
How easy is your Stocks and Shares ISA to use?
If you are struggling to understand how to add money, place a deal, or monitor your investments through your app or online portal, then it could negate some of the other benefits of your Stocks and Shares ISA account.
Industry awards are granted to providers for their platforms, and so it is worth paying attention to whether an ISA provider has any recent accolades in this regard.
You might find that, even though an ISA provider charges higher fees, the usability and convenience of their platform is worth the cost. After all, their rationale could be that they charge a higher fee to be able to invest more in these types of services that they provide to clients.
Can I transfer previous years’ Stocks and Shares ISAs into a new one?
If you have found a Stocks and Shares ISA that you like, you can transfer previous year’s ISAs into it as long as your new provider facilitates this. Here are some crucial factors to consider before you transfer your ISA:
- Can your new ISA hold your existing ISA investments – if not, then these will need to be sold before being transferred over, and you will need to choose something else to invest in
- Are there any transfer out fees – you may be subject to account closure or transfer out fees from your old provider, so you need to decide if transferring outweighs any charges you may incur
- Out of the market – if you are transferring your ISA as cash and you experience delays in your transfer, you may find that you are out of the market for a prolonged period of time. If the market goes up while you are sat in cash during your transfer, you could miss out on potential returns
- Can you transfer in-specie – to avoid losing out on potential growth, you can opt to transfer your ISAs in-specie, which means they will not be sold and then repurchased in your new ISA. However, this approach can take a lot longer as the stocks need to be re-registered with your new provider and it can also incur greater transfer fees
What happens to my Stocks and Shares ISA when I die?
Your ISA is treated in the same way as any other investment asset and will be subject to Inheritance Tax if your estate is liable.
Can I transfer a Cash ISA into a Stocks and Shares ISA?
Yes, you can transfer your Cash ISA into a Stocks and Shares ISA by completing a paper form with your new provider.
Will I receive dividends from a Stocks and Shares ISA?
Whether you receive dividends from your Stocks and Shares ISA will depend on the underlying investments you hold inside it. If your investments generate dividends, then you can opt to withdraw these automatically to your bank account tax-free if you wish.
How do I open a Stocks and Shares ISA?
You can open a Stocks and Shares ISA online or via the mobile app of the provider that you choose. You can also open one over the telephone or with a posted application form.
Can I withdraw funds from a Stocks and Shares ISA?
You can withdraw money at any time from your Stocks and Shares ISA.
How do I withdraw money from a Stocks and Shares ISA?
You can do this online, via a mobile app, on the telephone or with postal instruction. You will need to sell any relevant holdings first and then withdraw the proceeds.
Can I lose money in a Stocks and Share ISA?
Your investments can go up as well as down, and so you should always be prepared for the event that you could lose money.