If you are saving for the future, you might want to consider putting some money into a tax-efficient stocks and shares ISA.
There’s a wide range to choose from and, counter-intuitively, you don’t even have to invest in stocks and shares.
You might, for example, prefer bonds, government gilts, commercial property or commodities such as gold.
Whatever you decide, there are no guarantees of success. If company share prices fall, for example, or the commercial property or commodities markets implode, the value of your ISA will drop – and you could lose some or all your money.
That’s why you should only invest if you can stomach the risks and have enough time to ride out any market ups and downs.
You must be 18 or over to hold a stocks and shares ISA, which you can switch to a rival provider if you are not satisfied.
ISA providers must allow transfers out. However, they are not obliged to accept transfers in, so check before you start the transfer process
You can also cash in a stocks and shares ISA at any time, although most experts recommend you invest for a minimum of five years.
"You can buy an ISA direct from a fund manager or bank, or through a discount broker or a fund supermarket..."
Stocks and shares ISAs shelter your savings from tax on gains or income.
For 2016/17, the ISA allowance is £15,240.
So let’s say you invest £10,000 in a share fund this year. The fund performs well and is worth £30,000 when you sell, realising a £20,000 profit.
You would normally have to pay capital gains tax (CGT) at 10% or 20% (these are the CGT rates for the 2016/2017 tax year) on any growth in the value of your investment above the annual allowance of £11,100. In other words, you would have to pay CGT on £8,900.
Even at the lowest CGT rate that would cost you £890, a charge you can avoid by investing in stocks and shares ISAs.
By the same token, any losses on your ISAs cannot be used to offset any gains on other investments.
However, a stocks and shares ISA can minimise your income tax bill by allowing you to avoid tax on rental income on commercial property, or on the interest from any bonds or gilts.
You can pay into only one stocks and shares ISA in any one tax year.
However, you can choose to invest the full allowance in stocks and shares, in cash, or in a combination of the two.
You can also choose between making regular, monthly payments or paying in a lump sum.
And you don’t have to stick with the same ISA manager each year.
You can switch from one ISA to another if you are unhappy with the performance of your investments.
Savings from previous years can be split. But if you want to switch this year’s ISA, you must transfer all the money in the account.
For example, if you invested £15,240 in your ISA on April 6, 2016, you must transfer the full £15,240 to the new firm if you switch before the end of the 2016/17 tax year.
However, if you wanted to, you could switch just £1,000 of a £3,000 investment in an ISA from a previous year.
ISA firms have to allow transfers out, but they are not obliged to accept transfers in, so check before you start the transfer process. And don’t cash in your ISA and then invest in a new one. Instead, contact the provider and request a transfer to keep hold of your tax breaks.
You can switch from a cash ISA into stocks and shares, and the other way round.
Active or passive?
Stocks and shares ISAs fall into two broad categories. So-called active funds employ a manager to select stocks and hopefully beat the market.
Passive or tracker funds simply follow an index, such as the FTSE 100, or FTSE All Share. So, if the market goes down, so does the value of your ISA.
Charges vary according to the type of fund, but you can typically expect to pay an upfront fee of between 1.5% and 5%, plus an annual management charge of up to 1.5%.
You can buy an ISA direct from a fund manager or bank, or through a discount broker or a fund supermarket. Charges are usually reduced if you invest through either a broker or fund supermarket. You can review our range of stocks and share ISAs here.
Alternatively, seek help from a financial adviser who can guide you through the ISA maze. Just make sure you understand the cost of advice and whether the adviser is truly independent.
The other option is a self-select ISA that allows you to pick your own investments and keep control of your money. However, you should really know what you are doing before you consider a self-select ISA.
Regulation and compensation
Your stocks and shares ISA manager should be covered by the Financial Services Compensation Scheme, through which you could claim compensation of up to £50,000 if the firm went bust. The FSCS does not, however, compensate for poor performance.
If you have cash ISA savings, deposits up to £75,000 are protected by the FSCS.