For this week’s guide, Kirsty Stone, a chartered financial planner from The Private Office, tells us how to get started with a stocks and shares ISA…
What is a stocks and shares ISA?
This is a type of ISA that you can use to invest in shares, funds, investment trusts or bonds.
You don’t have to pay UK income tax or capital gains tax on money you earn from investments made through a stocks and shares ISA.
“You can contribute up to £20,000 per year into your ISAs – this could include stocks and shares ISA, cash ISAs, lifetime ISAs or a combination, but it’s important to remember that this limit applies across all ISAs you open in a single tax year,” Stone says.
What are the pros of having one?
“If you’ve been thinking about growing your savings and you have regular surplus income or capital set aside which is not needed in the short term, a stocks and shares ISA could be an option worth considering,” Stone says.
“The beauty of an ISA is that the returns you earn are all tax-free, which can really help your money grow faster compared to regular savings accounts, where interest is often taxable – and so too are capital gains if you sell investments that are not held within a stocks and shares ISA wrapper.”
If you have a medium or long-term savings goal, Stone says a stocks and shares ISA is worth considering over a cash ISA.
“Over the long term, investing in stocks and shares has traditionally provided better returns than leaving your money in a regular cash-based savings account,” she explains.
“Historically, the stock market has offered stronger growth, especially if you’re willing to invest for the long term (typically a minimum of 5, 10, or even 20 years). However, of course, like all investments, there are risks involved.”
What are the cons?
Unlike a savings account where your money is guaranteed to grow either at a fixed or variable rate, a stocks and shares ISA is subject to market fluctuations.
This means that investment returns are not guaranteed and you may get back less than originally invested.
“The value of your investments can go up, but it can also go down, and in the short term, you have to be prepared to ride out these fluctuations,” Stone says.
Many investment platforms or providers also charge a fee to have a stocks and shares ISA, she adds, saying it is important to shop around and compare platforms.
What can you do to get started?
For someone who hasn’t invested before, Kirsty warns the world of investing can be very daunting – but you can seek independent financial advice from a professional to help you.
“For those who do not wish to do this, you’ll need to decide what markets or assets to allocate your ISA contribution to, how to diversify it and how much risk you’re comfortable taking with your investment,” she says.
“If you’re unsure about how to pick investments or feel intimidated by the choices available, you might find it helpful to start with a prebuilt portfolio by the company you choose to open your ISA account with.”
These portfolios can factor in what level of investment risk you wish to take and any ethical or sustainable preferences you have with your savings.
Stone says: “Often investing in a fund rather than an individual share of a company offers a greater level of diversification and lessens the risk of one individual company doing poorly as a fund will normally hold dozens of companies at any given time.”
If you are already investing outside an ISA, Stone suggests considering switching to a stocks and shares ISA.
Unlike pensions or other locked-in investment vehicles, you can withdraw your money whenever you need from a stocks and shares ISA, she says.
This is for general information only, does not constitute individual advice and should not be used to inform financial decisions.
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