Stocks and shares ISAs explained
Interest rates on cash ISAs are extremely low, so it’s perhaps not surprising that many people are thinking of putting money into a stocks and shares ISA. ISA rules changed in July 2014 and again in April 2016, meaning there is now greater flexibility on investments and transfers.
In the 2016/2017 tax year, you can invest up to £15,240 into an ISA. This can be invested in cash or stocks and shares, or a combination of both.
Range of assets
A stocks and shares ISA offers the potential for higher returns than a cash deposit and you can invest in a broad range of assets including shares, bonds, commercial property and commodities. But stocks and shares ISAs are riskier than cash plans. If the stock market crashes or the property market implodes, you could lose all your money, including your original stake.
Some ISAs are riskier than others: an investment in emerging markets is likely to be more volatile than government gilts. You should therefore pick a scheme that reflects your appetite for risk.
And don’t forget that a stocks and shares ISA is a long-term investment of, ideally, at least five years. This period of time should hopefully enable you to ride out the ups and downs of the market.
Most people opt for an ISA run by an experienced manager, but others prefer to take control of their investments with a self-select ISA. It’s worth bearing in mind, however, that self-select ISAs are really only suitable for experienced investors with a full awareness of and stomach for the risks involved.
The big advantage of a stocks and shares ISA is, of course, the shelter from capital gains tax (CGT). You would normally pay CGT on any profits above £11,100 a year when you sell, but assets in an ISA are free from CGT.
Since the start of the new tax year on April 6, 2016, all taxpayers now have an annual tax-free dividend allowance of £5,000. Only dividend income above this allowance is taxed at new, higher rates.
The introduction of this new allowance means that investment ISAs may look less attractive if you have dividend income below £5,000. But bear in mind that your dividend income may rise above this limit over time, and profits on investments held outside an ISA are potentially liable for CGT.
Watch out for charges on stocks and shares ISAs. Some funds levy an initial fee of up to 5%, plus an annual management charge of around 1%, which can eat into investment returns. You might also have to pay an adviser’s fees on top. But if you don’t need advice, you can probably buy your funds cheaper though a discount broker or a fund supermarket.
The Financial Services Compensation Scheme covers ISA investments up to £50,000 if your ISA manager should go bust. But remember, the FSCS does not compensate for poor performance. Cash ISAs are protected up to £85,000 by the FSCS, as of 30 January, 2017.