If you’ve been wanting to dive into investing, and all recommendations have been pointing you in the direction of a Stocks and Shares ISA, you probably need a detailed overview of exactly what it is and how it works before you get in at the deep end.
We’ve put together this Stocks and Shares ISA guide to help you get your feet wet, comparing it with some other financial products to check it’s the right choice for you before you take the plunge.
- What is a Stocks and Shares ISA?
- How do they work?
- Benefits of Stocks and Shares ISA
- How many Stocks and Shares ISAs can I have?
- How does a Stocks and Shares ISA compare to other options?
- Stocks and Shares ISA transfer
- How to open a Stocks and Shares ISA
What is a Stocks and Shares ISA?
Sometimes called an ‘Investment ISA’, a Stocks and Shares ISA is a tax-efficient account that lets you invest in a range of assets, like shares and bonds.
Everyone aged 18 or over in the UK is entitled to invest with a Stocks and Shares ISA. And while it may seem like a bit of a jump after having only ever saved money, many people have dived into investing as a way to beat inflation. Investing is usually considered to be a 5-to-10-year commitment (and ideally, longer), as the objective is to see long-term growth and to ride out any ups and downs in the market.
Many providers that offer Stocks and Shares ISAs understand it’s a bit of a leap into the unknown for anyone who hasn’t ventured there before. Wealthify is one of those — we have an expert Investment Team who are dedicated to investing and managing the funds on your behalf. And while there’s always the risk with investing that you might not get back what you put in, we’re ready with guidance, support, and market updates for our customers every step of the way.
Please remember, with investing, your capital is at risk, and you could get back less than you put in.
How does a Stocks and Shares ISA work?
ISAs tend to fall into two categories:
- One where you’re saving money and earning on your interest;
- The other is where you’re investing your money and making profits through the returns.
But with both options, the extra money that you make in the process is tax-free on withdrawal.
That means, with a Stocks and Shares ISA, you can invest up to £20,000 during each tax year (this amount must be split across all the ISAs you pay into though) with the intention of letting those investments build profit and be reinvested over a long period of time.
At Wealthify, we know that each customer would approach the risks of investing differently. That’s why we offer 5 distinct investment styles, from Cautious to Adventurous, ensuring everyone can invest in a way that matches their values and comfort level.
Our Investment Team then put their expertise to work – tailoring an Investment Plan that matches your style – and they continue to manage the funds for you, keeping your investment preferences as their priority.
Please remember, with investing, your capital is at risk, and you could get back less than you put in.
Flexible Stocks and Shares ISA
What does this mean? Well, ISAs can be flexible or non-flexible; and it all comes down to how locked in you want your £20,000 allowance to be.
Non-flexible ISAs:
These have stricter rules about how you withdraw your money; if you decide to deposit some money into your non-flexible Stocks and Shares ISA during the tax year, you can’t withdraw money in the same tax year without you losing that portion from your ISA allowance. However, you can transfer your funds to another provider or ISA type (keeping in mind that Lifetime ISAs have specific deposit limits) to keep your full £20,000.
Flexible ISAs:
These let you deposit and withdraw as often as you’d like to over the tax year (April 6th – April 5th). And, as long as you’re not investing or saving more than your allotted £20,000 across all ISAs you’re paying into that tax year, your remaining overall allowance won’t be reduced each time you withdraw.
Whichever you opt for though, keep track of how much you’re depositing into your Stocks and Shares ISA and any other ISAs you’re contributing to. This is because it’s your responsibility to not let this combined amount go above your £20,000.
Benefits of Stocks and Shares ISA
Stocks and Shares ISAs have a range of benefits, not least that using one could be an easy first step on your investment journey.
- They make investing easily manageable and accessible to everyone in the UK who’s 18 or above.
- They allow you to invest tax-free (with no income tax or capital gains to pay!) up to £20,000 during each tax year.
- Your profits and interest can roll over and be reinvested, too, allowing the power of compounding to benefit you further.
Considerations
- As with all investing, the main thing to keep in mind when using a Stocks and Shares ISA, is that there is risk involved. While the goal is to grow your long-term wealth, it’s possible that the markets won’t perform as well as hoped, and you could get back less than what you put in.
- Another consideration to factor in your long-term goals, is that the £20,000 allowance may be subject to change in the future.
- As your money is invested in various assets, you can’t withdraw your funds instantly, as it takes a bit of time for these to be sold, and their cash value transferred to you.
How many Stocks and Shares ISAs can I have?
As of April 2024, new rules were introduced to allow people to open as many ISAs with as many providers as they choose. The only exceptions to this being Lifetime ISAs (as you’re only allowed one of these at any given time) and Junior Stocks and Shares ISAs (but these are for children).
So, for example, you could have:
- A Cash ISA to hold your short-term savings (anything you may spend in the next few years);
- A Stocks and Shares ISA for your investing for your long-term goals;
- A Lifetime ISA to help with a first home purchase;
- And even an Innovative Finance ISA although those are much riskier than the others mentioned.
The only caveat is that you can’t exceed your £20,000, with that amount spread across all four types, no matter how many different providers you have. (You don’t get £20,000 for each type — it’s in combination of all of them!)
And while you can have lots of ISAs with different providers, if you can find some with low fees, it’s worth considering whether to keep it simple with only one of each type. From there, you’d let those pots of money build so that you can explore the effect of compounding interest — allowing your interest and gains to grow and further bulk up your total.
NB: Junior ISAs have a separate allowance amount of £9,000, because it belongs to a child and the parent/guardian manages it for them. And Lifetime ISAs have a limit of how much you can deposit into them, currently £4,000 per tax year.
How does a Stocks and Shares ISA compare?
There are other options for saving and investing, right? Let’s go through a quick comparison of other financial products, so you can decide whether they are right for you versus a Stocks and Shares ISA:
Cash ISA vs Stocks and Shares ISA
Pros:
- This is a savings account, not an opportunity to invest. But unlike a traditional savings account, any interest you earn is tax-free.
- Compared to the long-term nature of investing in a Stocks and Shares ISA, Cash ISAs are better suited for short-term saving, such as money you'll need within the next five years. Be sure to check if your Cash ISA offers instant access in case of an emergency.
Cons:
Regardless of whether your savings are held on a ‘fixed’ or ‘variable’ rate, — your interest is tied to the provider’s AER (annual equivalent rate). If it’s variable, it will rise and fall in line with the Bank of England’s base rate. Although there’s no guarantee of how markets will perform, over time, you may not see as competitive returns while saving with a Cash ISA, as you could if you’d invested that money instead with a Stocks and Shares one. For a more detailed comparison, check out this article: Cash ISA vs Stocks and Shares ISA
Lifetime ISA vs Stocks and Shares ISA
Pros:
- Lifetime ISAs (also known as LISAs) are usually used for first-time home buyers looking to take out a mortgage, or as a personal pension to withdraw after 60, because the government offers an extra 25% top-up towards those goals. Meaning, if you deposit £4,000 in the tax year, you would get another £1,000 from the government for free.
- You can choose between a Lifetime ‘Cash’ ISA or Lifetime ‘Stocks and Shares’ ISA. However, there are some key considerations about withdrawing from these accounts, versus the freedom that a standard Stocks and Shares ISA offers instead.
Cons:
- You can only have one Lifetime ISA at any given time.
- There’s a £4,000 limit to how much you could deposit in any tax year. However, as you have £20,000 to spread across all your ISA accounts in the same year, you can use the remainder of your allowance in other types of ISAs you have.
- If you are using it to save for your first property purchase, you can only purchase one up to £450,000.
- You may face a charge and lose your 25% top-up (and applicable interest) if you withdraw earlier than one year from opening the account, or for anything other than a property purchase/personal pension.
- You can only open a Lifetime ISA while you’re between 18-39.
- Paying into a Lifetime ISA is only available up to the age of 50.
- If you’re buying your first property with it; private mortgages from friends or family don’t apply, and you must use a solicitor/conveyancer to complete the purchase.
SIPP vs Stocks and Shares ISA
Pros:
- A Self-Invested Personal Pension (or SIPP for short) is a long-term solution for investors looking to build up a pension pot for retirement. You could still invest money for your pension in a Stocks and Shares ISA, with all your gains over the year being tax-free on withdrawal.
- A tax-relief of 20% is added by the government to anything you deposit into a SIPP. This is to offset the tax you’ve already paid on the money you’ve earned.
- At retirement age, you can withdraw lump sums where the first 25% is tax-free, then the remaining 75% is taxed as income tax would usually be.
- You can transfer your past pensions into one simple-to-manage Personal Pension very easily, and let that grow.
- Much like a Stocks and Shares ISA, with a Self-Invested Personal Pension you can have more control over how your funds are invested.
Cons:
- Age restricted; not as late as State Pension age, but not accessible before 55 (rising to 57 by 2028).
- While the Stocks and Shares ISA will be 100% free from capital gains or income tax when you withdraw, your pension withdrawals will only be tax-free for the first 25%. So, it might be sensible to sit down with a calculator or independent financial advisor to work out which is the most cost effective for you.
- Fees can vary, but if yours are high it could have a big impact on your retirement fund.
To help you compare, Wealthify offers a basic annual management fee of 0.6% for all our Investment Plans (including both Stocks and Shares and our Personal Pension). However, any pension balance that reaches the £100,000 benchmark or above, gets an even lower fee of 0.3% for that portion.
General Investment Account vs Stocks and Shares ISA
Pros:
- Often treated as a way to keep investing after someone has maxed out their ISA allowance in a tax year.
- Very similar to a Stocks and Shares ISA in terms of how you can invest and access the stock markets; be that yourself in a DIY way, or with the help of a professional investment team.
Cons:
- General Investment Accounts do not have the tax benefits that Stocks and Shares ISAs do. You will be taxed after your profits reach over £1,000 per tax year.
Stocks and Shares ISA transfer
As your ISA allowance has so much tax-free benefit to it, it’s quite precious. And, as we mentioned earlier, withdrawing anything you’ve deposited during the current tax year from a non-flexible ISA can negatively impact your remaining ISA allowance. As you can’t get that allowance back (or roll it on to subsequent years), it’s worth taking care of it.
If you want to transfer your ISA to a new provider while keeping the tax wrapper, you’ll need to use the new provider’s official form or transfer service, rather than withdrawing the funds and opening a new account.
Once you have a new Stocks and Shares provider in mind, they should give you a step-by-step guide on how to complete the transfer request, then leave it to them to move your money over. With Wealthify, for example, we have a simple form to complete and we take it from there.
How do I open a Stocks and Shares ISA?
It’s pretty straightforward once you have a provider in mind and are comfortable with their fees. With digital investment platforms, like Wealthify, opening a Stocks and Shares ISA has never been easier.
You can get started with ours with as little as £1 — just let us know whether you’d like to invest in our Original or Ethical Investing Plan, answer a few suitability questions, and leave it to us to help you build your best-suited Stocks and Shares ISA.
Available to anyone living in the UK, who’s 18 or above, your investing journey could start today if you’re ready to take the plunge. Why not play around with our projection sliders to see how your money could potentially grow in one of our Stocks and Shares ISAs.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
References:
[1] https://www.gov.uk/individual-savings-accounts/withdrawing-your-money
