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A guide to Stocks & Shares ISAs

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Interest rates on cash ISAs are low, so you might decide to invest your money in a stocks and shares ISA. In the current 2016/2017 tax year you can invest up to £15,240 in an ISA either in cash, stocks and shares, or peer-to-peer lending through an innovative finance ISA, or you can choose a combination of these.

Returns from ISAs are free of both income tax and capital gains tax (CGT).

The difference between cash and stocks and shares ISAs

You can choose to hold your full £15,240 ISA allowance in either cash or stocks and shares, so understanding the difference between the two is important. A cash ISA is effectively the same as a regular savings account, except returns aren’t subject to income tax. As such, it is risk-free, although your returns may not necessarily keep pace with inflation.

With a stocks and shares ISA, however, your money is invested in equities, the price of which can go up or down, so you may get back less than you paid in. Investments that can be held in stocks and shares ISAs include unit trusts, open-ended investment companies (OEICs) and investment trusts, as well as government bonds and corporate bonds.

You can also hold individual shares in what is known as a ‘self-select’ ISA, but bear in mind the fewer the number of companies you invest in, the greater the risks.

Remember that, if you do take money out of your ISA, you cannot replace it later in the year.

Remember that, if you do take money out of your ISA, you cannot replace it later in the year.

If you are nervous about stock market volatility, you don’t have to invest your whole ISA allowance in one go. By investing on a monthly basis, rather than paying in a lump-sum, you are likely to stand a better chance of riding out the short-term ups and downs in the market. This is due to a process called ‘pound cost averaging’ which basically means that you are buying fewer shares when prices are high and more when prices are low, so you don’t have to worry about deciding when is the best time to invest.

If your ISA funds aren’t performing as well as you’d hoped, you can switch to a different provider. You can also transfer from a cash ISA to a stocks and shares ISA and you can switch it the other way around too, from stocks and shares into cash.

You can usually take money out of a stocks and shares ISA whenever you want, but ideally you should invest for a minimum of five to 10 years to take account of market cycles and fluctuations. Remember that, if you do take money out of your ISA, you cannot replace it later in the year.

You must still be aged at least 18 to invest in a stocks and shares ISA, but you only have to be 16 to invest in a cash ISA.

Charges

When you invest in a stocks and shares ISA, you will usually pay the fund manager who will be managing your investment an initial fee. This can be as high as 5.5%. There will also be an annual management charge, typically 1.5%.

However, you can keep stocks and shares Isa charges to a minimum by investing through a fund supermarket or discount broker. Fund supermarkets can “bulk-buy” funds, giving big discounts on initial charges.

If you invest through a discount broker, they often rebate the sales commission paid to them by the fund provider.

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