Investment ISA Pros and Cons
The tax-free returns offered by an Investment ISA (otherwise known as a Stocks and Shares ISA) can be very tempting at first glance - however, as with any investment, it is important to weigh up the pros and cons. So we've put together a list of what you need to consider before opening your own Stocks and Shares ISA account.
What’s an Investment ISA?
An Investment ISA - also known as a Stocks and Shares ISA - is a tax-free wrapper for your savings which enable you to earn returns on your investments which are safe from the tax man.
The tax allowance for the tax year 2020/2021 is £20,000 – and it’s never too early to be squirrelling your money away to maximise your tax-free returns.
In order to open an Investment ISA, you must be:
18 or over
a citizen of the UK
So, What are the Pros and Cons?
Talking about the “pros and cons” of an Investment ISA is difficult to narrow down; to a certain extent the pros and cons of opening an Investment ISA will differ on the individual and their circumstances.
However, there are some pros and cons which will apply to most people, which we’ve put together in this blog.
- All types of ISA enjoy tax-free status, meaning that any of the returns that you gain from your investments are kept in a tax-free wrapper.
- The government sets a yearly amount which you can put into an ISA account.
- Within an ISA account, any returns made on these investments will be tax free, so with the right investment you can stand to make quite a bit in returns.
- With an Investment ISA you can expect:
- No capital gains tax on profits which result from an increase in share prices.
- No tax on bond interest
- No tax on dividends.
Plenty of Variety
- An "Investment ISA" is an umbrella term which covers lots of different types of ISAs.
- You can open one per year and you can hold as many as you would like.
- Examples of types of Investment ISAs include:
- Index Tracker ISAs
- Fund Supermarket ISAs
- Ethical ISAs
- ETF ISAs
- High Income ISAs
- Lots of platforms will have flexible options regarding the management of your Investment ISA.
- You can either take a DIY approach and manage your investments and funds yourself, or you can pay for a fund manager to use their expertise to manage your investments for you.
- Depending on your experience and preference, you can choose the management style that suits you best.
- It's well known that the current interest rate is at an all-time low; in fact, interest rates for Cash ISAs and Savings Accounts have been very poor for the past few years. Many people prefer an Investment ISA instead, as these tend to have higher interest rates, meaning higher returns for your money.
- The stock market can easily go down instead of up; with an Investment ISA, you run the risk of getting less money back than you originally put into the ISA.
- This is no different to any other investment, so if you're a regular investor then this should not intimidate you - but if you have a low risk tolerance then you may prefer another form of ISA.
- Generally speaking, most people with an investment ISA would aim to keep that investment for at least 5 years, in order to account for fluctuations in the stock market.
- If you feel that you might need your money in a time frame which is less than five years, then you may be better off choosing a Fixed Term Cash ISA, of which there are lots of different term lengths.
- With most investment ISAs, your money will be locked away for a set period of time.
- If you choose to withdraw your money in that period, then it will loose it's tax free status, as well as potentially incurring a penalty from your provider.
- So, if you believe you might need access to this money sooner rather than later, then an Investment ISA account may not be for you.