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Stocks and shares ISAs explained

Stocks and shares ISAs are a tax-efficient way of investing in the stock market. This type of account shields returns on your investment from Capital Gains Tax and Income Tax.

In the long-run, stocks and shares ISAs offer the potential for higher returns than earning interest with a cash ISA. However, it’s important to remember the risks associated with investing, as returns aren’t guaranteed and there’s a possibility your investment could lose value.

There are a range of different products you can invest in using a stocks and shares ISA, including:

• Individual stocks and shares: This is when your money is used to buy a portion of a company; if the company’s value increases, the amount your investment is worth will also rise.

• Unit trusts, investment trusts and/or Open-ended Investment Companies (OEICs): These are means of investing in a portfolio of bonds and shares which are overseen by a fund manager, or that track a benchmark, such as the FTSE 100 index.

• Exchange-traded funds (ETFs): These types of funds contain a range of investments such as shares, commodities and bonds which are traded on the stock market. Most will track the performance of a particular market index.

• Government and/or corporate bonds: This is when your money is loaned to either a company or the Government and will receive fixed interest in return.

A stocks and shares ISA will apply a tax-wrapper to any income or growth earned from your investment. However, the same rules apply as to other types of ISAs.

Stocks and shares ISA rules

• From 6 April 2024, you can open and pay into multiple stocks and shares ISAs within the same tax-year.

• It’s possible to move funds held in a stocks and shares ISA to and from other types of ISAs, depending on whether your new provider accepts transfers in.

• Equally, you can move your existing stocks and shares ISA to a different platform. However, you should use an ISA transfer to do so in order to retain your tax-free benefits. For more information, read our guide on ISA transfers.

• The maximum amount you can invest across all types of ISAs each tax-year is £20,000, as per the annual ISA allowance.

• You need to be aged 18 or over to open an adult stocks and shares ISA.

• Junior stocks and shares ISAs are available for those under the age of 18.

• Similarly, those under 40 could consider a Lifetime stocks and shares ISA to help save towards buying a first home or for retirement.

When it comes to opening a stocks and shares ISA, there are a number of factors you’ll need to consider:

How much do you want to invest?

While you’re only allowed to put away £20,000 in ISAs each tax-year, it’s possible to transfer more than this for funds held in an existing ISA to a stocks and shares ISA. In addition to deciding the amount you want to invest, you’ll also need to choose how it’s invested: as a lump sum or by drip feeding investments on either a regular or ad hoc basis.

From where do you want to buy your stocks and shares ISA?

Another consideration is from where to buy your stocks and shares ISA. For instance, you can find stocks and shares ISAs either directly from a provider or by using an investment platform. The decision of from where to buy your stocks and shares ISA will also depend on whether you want to select and manage your own investments, or have a financial adviser, fund manager or company oversee a portfolio on your behalf.

What are the fees involved?

There are also some fees involved in opening a stocks and shares ISA, which can include:

• Annual Management Charge: is a yearly fee that covers the cost of managing your investments.

• Platform fees: either a flat fee or a percentage of the value of your funds/investments which applies when using an investment platform.

• Trading fees: apply each time you buy or sell an investment. Again, they can either be a flat fee or a percentage of the transaction.

• Exit fees: may apply if you choose to transfer from one provider to another.

What’s your attitude towards risk?

Investing always presents a risk to your capital, however, some types of investments carry higher levels of risk than others. For instance, investing in smaller companies or emerging markets will often be more volatile than investing in a well-established business or region. When opening a stocks and shares ISA, you should be fully aware of and comfortable with any risks involved in your investment.

In the year to February 2024, the average stocks and shares ISA experienced a growth of 2.80%. In contrast, the average cash ISA returned 3.73% within the same period.

In spite of this, stocks and shares ISAs offer the potential for greater returns than a cash ISA over a longer period (more than five years, for example). As a result, some volatility year-on-year is to be expected. Keep in mind, though, returns are never guaranteed.

In terms of the best performing fund sectors, both North America and Japan saw a significant increase of 14.22% and 10.18%, respectively, in the year to February 2024.

However, keep in mind past performance is not indicative of future returns. Sectors returning significant growth one year can just as easily fail to perform the next. For example, the Commodities and Natural Resources fell by almost 13% over the 12 months to February 2024, having been the best performing sector between 2022 and 2023.

Yes, it’s possible to lose money with a stocks and shares ISA if your investments perform poorly. This is a risk you should fully understand and be comfortable with before investing. However, it’s only considered a loss if the value of your investment falls below the amount of money you initially paid in. As stocks and shares ISAs are typically a longer-term form of investing, some fluctuation in the market is to be expected. A loss will only become realised when you sell your assets and they are worth less than you paid for them.

What happens if your stocks and shares ISA provider goes bust?

Investments of up to £85,000 in a stocks and shares ISA are protected under the Financial Services Compensation Scheme (FSCS), so long as your provider is regulated by the Financial Conduct Authority.

Yes, you can withdraw money from a stocks and shares ISA at any time. Furthermore, any returns made on your investments will be free from needing to pay Capital Gains Tax or Income Tax. However, you shouldn’t simply withdraw your funds if you’re looking to reinvest with a new stocks and shares ISA provider or move to a cash ISA. Instead, an ISA transfer will retain the tax-free status of your investment and won’t count towards your annual ISA allowance.