Savings account Guides

Share ISAs

Updated: 15 June, 2011

By Hazel Cottrell - hazel.cottrell@consumerchoices.co.uk

If you want to invest in stocks and shares, putting your investments in an ISA wrapper can be a great way to maximise your returns.

The tax benefits of stocks and shares ISAs are particularly advantageous to higher rate taxpayers or those likely to pay capital gains tax. However, those who pay tax at a basic rate can also benefit from a stocks and shares ISA.

In this guide we look at the questions you should ask before you invest and discover how to put your stocks and shares ISAs to the best use.

• Is investing right for me?
• Choosing a stocks and shares ISA
• What can I invest in?
• Where to buy shares ISAs
• Collective investments
• Costs and charges
• Withdrawing money from a shares ISA
• Getting independent financial advice

Is investing right for me?

If you want to invest in the stock market, then a stocks and shares ISA can provide a handy tax wrapper in which to do this. However, investing in the stock market can be a risky business and requires careful consideration and is not suitable to everyone.

Unlike a cash ISA, whose value can only increase, the value of a stocks and shares ISA can decrease as well as increase.

Before you decide whether to invest your cash, you should consider the following questions:

• Are you debt free? - If you have any kind of debts then you should focus on paying these off before you make any kind of investment. The interest you are paying on your debts will almost definitely be greater than any returns you’ll receive for from your investment.
• Have you got rainy day savings? - You should have saved enough money in an easy access account to provide for yourself and any dependents for at least three months, before you consider investing money elsewhere.
• Can you leave your cash invested for five years? - If you think you may need your cash back within the next five years, investing it in the stock market is not likely to be your best option. This is due to the charges you’ll have to pay and short-term market fluctuations.
• Are you willing to risk losing cash? - Investing in the stock market is a gamble and does involve a variable element of risk. It’s important to be aware that the value of your investment may fall and you might not get beck your original investment.

If you can answer yes to all these questions, then you may be ready to invest in a stocks and shares ISA.

However, before investing any amount of money, it would be wise to contact an independent financial adviser (IFA) who can provide you with detailed information for your own personal circumstances.

Back to the top

Choosing a stocks and shares ISA

When choosing investments for a stocks and shares ISA, your options are as wide as they are deep.

The type of investment that suits you will depend on your own personal circumstances, investment objectives and attitude to risk.

From the 6th April 2011 the ISA limit for that tax year is £10,680. This means you can put the full £10,680 into stocks and shares or a maximum of £5,340 into a cash ISA and the remaining £5,340 into a stocks and shares ISA - or a mixture of the above as long as you don’t exceed the cash limit.

Back to the top

What can I invest in?

A variety of non-cash assets can be held within a stocks and shares ISA. These include:

• Individual shares and corporate bonds issued by companies officially listed on a recognised stock exchange anywhere in the world
• Collective investments such as unit trusts, investment trusts and open-ended investment companies (OEICS) which are more commonly referred to as investment funds
• Exchange traded funds
• Gilts and bonds

You can only invest a stocks and shares ISA with one financial institution each year.

If you want complete control over your investments you can opt for a self-select ISA. This is usually managed by a stockbroker and you can pick shares in individual companies of your choice. These ISAs give you the most flexibility and choice, but if all your money is invested in just a couple of companies then the risk of losing it can be very high.

However, the most common use for a stocks and shares ISA is for collective investments. In a collective investment your money is pooled with that of other investors and invested in selected shares based on specific investment criteria.

The value of your investment depends of the collective performance of the shares selected. This approach is known as diversification and means that if one company in the collective portfolio does lose money or boes bust, there are plenty of others to help compensate for the loss.

Back to the top

Collective investments

Most first-time investors will start with collective investments.

Of course, different types of investments have different benefits and disadvantages, though some do tend to be a safer bet than others.

You should always get independent financial advice before investing your cash to make sure you pick the right stocks and shares for your situation.

Back to the top

Where to buy shares ISAs

You can buy stocks and shares ISAs directly from the fund managers of collective investments.

However, it can actually be more cost effective to buy from an IFA as many will rebate some of their commission so that the initial charge is reduced. You will also get advice on the best fund for your circumstances.

Finally, you can buy your ISA from “discount brokers” and “fund supermarkets” which also offer discounts on the charges and fees. However, these will offer funds they recommend to customers, rather than investments based on your individual needs.

Back to the top

Costs and charges

When choosing a stocks and shares ISA it’s important to look at any extra charges you might have to pay. The cost of a stocks and shares ISA depends on where you buy it and what you invest in, but these charges will be the same regardless of whether you invest through an ISA or not.

The charges are used to pay commission to financial advisers, pay fund managers and cover a whole raft of admin fees such as dealing costs and stamp duty on share purchases.

Although the ISA wrapper is free, most actively-managed investment funds come with initial and annual management charges. This can range from 0.5% –- 5.5% although many companies will offer discounts.

You will also pay an annual management charge, which typically ranges from 0.5% - 2% of the cash value of your investment.

Trackers have the lowest fees: zero initial charges and a maximum of 1% annual management fee, although many charge even less.

Back to the top

Withdrawing money from a shares ISA

As with cash ISAs, once you have used your allowance for the current tax year, any money you withdraw cannot be paid back in to your ISA. Regardless of how much you withdraw, you can only invest up to the top ISA limit in each tax year (£10,680 for 2001/12), so think carefully before making any withdrawals.

Any income you receive from your investment is treated in the same way as money withdrawn, so if you are looking to build up your capital investment, you may want to consider an “income re-investment” option which automatically adds your income to your capital.

Back to the top

Getting independent financial advice

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 who specialises in investments and is authorised by the Financial Services Authority.

Back to the top