Savings account Guides

Stocks and shares ISAs: are the risks too high?

Updated: Wednesday 11 April, 2012

By Martin Fagan

The current climate of low interest rates means the returns from cash ISAs are low , but is it worth taking a risk on a stocks and shares ISA instead?

Individual Savings Accounts (ISAs) are the tax-efficient way to save your hard earned cash. There are two main types of ISA, cash ISAs and stock and shares ISAs.

Cash ISAs are the more straightforward of the two and act more or less like a bog standard savings account. Stocks and shares ISAs are significantly more complex and not something that should be entered into lightly.

• What exactly is a stocks and shares ISA?
• Who are they for?
• How much can you invest?
• Where can I get one?

What exactly is a stocks and shares ISA?

Essentially a stocks and shares ISA is a tax-free wrapper into which you can place different investments. And growth in the shares value or any dividends paid will be tax free. You don’t even have to inform HMRC that you have ISAs.

With a stocks and shares ISA you will be able to put your savings into a wide range of investments such as shares in individual companies, unit trusts, open-ended investment companies (OEICs) and investment trusts, as well as government and corporate bonds.

Like usual investments, these funds will rise and fall with the markets; however, the added bonus of a stocks and shares ISA means that any gains made on your money will not be taxed.

However, you must also be aware that unlike a cash ISA, which can only increase (although it may not outperform inflation in the current climate), there is an element of risk involved with a stocks and shares ISA and the value of your investments can fall as well as rise.

Also be aware that stocks and shares ISAs usually have charges attached to them to pay commission to financial advisers, cover admin costs and pay fund managers.

These costs will vary, depending on what you invest in, but aren't usually any higher than those you'd pay if you invested outside an ISA.

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Who are they for?

Putting the tax benefits aside, investing is a risky business, whether you’re doing it through an ISA or elsewhere.

So be warned that opting for a stocks and shares ISA requires careful consideration, as it involves an element of risk and is not suited to everyone.

To be eligible for an ISA you must be a UK resident, a Crown employee (such as a diplomat), a member of the armed forces and aged over 18 for the stocks and shares component (aged 16 for the cash ISA). An ISA must be in your name alone - you can’t have a joint ISA.

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How much can you invest?

The annual ISA allowance has increased for the current tax year 2012/13 (6 April 2012 to 5 April 2013) to £11,280 from £10,680. Up to half of this - £5,640 - can go into a cash ISA and the rest can go into a stocks and shares ISA. Alternatively you can put the whole lot into a stocks and shares ISA.

So the overall ISA allowance is £11,280 with a maximum £5,640 allowance for cash. But remember: regardless of whether it’s a cash or stocks and shares ISA, once you‘ve used your allowance for the current tax year, any money you withdraw from your ISA cannot be paid back in.

You may only pay in the set amount each year, regardless of how much you withdraw, so think carefully before making any withdrawals.

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Where can I get one?

You can either buy stocks and shares ISAs directly from the fund managers who manage collective investments such as unit and investment trusts or you can also buy your ISA from “discount brokers” and “fund supermarkets”. However, although these organisations offer “recommended” funds they cannot actually offer advice tailored to your particular financial circumstances.

However, unless you are an experienced investor, the best way to make the most of your stocks and shares ISA is to get advice from an independent financial adviser (IFA) who specialises in investments and is authorised by the Financial Services Authority (FSA).

It can also be more cost effective to buy from an IFA as many will rebate some of their commission so that the initial charge is reduced and it will be cheaper than buying direct from the asset management company. This way, you get advice as to which fund to invest in and pay lower fees.

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