Stocks & Shares ISA’s

Investing in a stocks and shares ISA is not without risks. Whether you should invest depends on your personal circumstances and the amount of risk tolerance. Stock valuations are especially volatile but over the long run, historically, stocks and shares have outperformed money in savings accounts. But that’s no guarantee they’ll do so in future. Always remember, investments can go down as well as up.

Renowned investor, Warren Buffett once said, saying “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” In short, in the short term it will likely be a bumpy ride and you should invest for at least 5+ years. This allows enough time to ride out any bumps in the market that might see you make a loss on your money.

It’s important to understand that there’s no such thing as the best stocks and shares investment. This makes selecting an investment that meets your risk tolerance and time horizon. In short, a stocks and shares ISA will very likely trend up and down. This makes knowing which stocks and shares ISA is best for you crucially important.

You can buy stocks & shares ISAs from different providers such as banks and building societies. There are also large investment institutions that have specialised in investing for decades. This includes the likes of Fidelity and Vanguard. Modern technology has also brough about the rise investment apps such as Freetrade.

The cheapest way to do it is through a website, often called a ‘platform’, with low account fees and ongoing fund fees. Which is what I have chosen to focus on in this stocks and shares ISA guide. Depending on how you want to invest in your stocks and shares ISA then a different platform may be better suited to your investment needs.

How to invest money in a S&S ISA

Investing in a stocks & shares ISA is a two-stage process:

1. You need to decide what investments to put in it. What is your investment strategy?

2. You first need to pick which provider to wrap your investments in an ISA wrapper.

There are three ways you make money from investing. One is when the shares increase in value and you profit when you sell them. The second is when they pay dividends. The third is from a coupon (interest payment) on a Bond.

• With investments held inside a stocks and shares ISA, you DON’T pay any capital gains tax (CGT) on gains made within an ISA – great if you exceed the £12,300 annual CGT allowance
• You DON’T have to pay tax on any dividend income on shares held in a stocks & shares ISA.
• You DON’T pay any income tax on interest from corporate bonds in an ISA

Tax On Investments Outside a Stocks And Shares ISA

*CGT is a tax you have to pay on the gain you make when selling things such as shares. You’re allowed to make £12,300 of gains this tax year (2022/23) tax-free outside an ISA. So you would ONLY gain using a stocks & shares ISA in a year where you were making total gains over £12,300. (From April 2023 the threshold for paying tax on capital gains will be lowered to £6,000 and then further to £3,000 from April 2024).

Outside of a stocks and shares ISA (A general investment account) you would also have to pay tax on any dividends received above a threshold* *at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers. Note: from April 2023, the dividend allowance will lower to £1,000/year and then further to £500/year from April 2024.

If you’re investing in corporate bonds outside a stocks & shares ISA, it’ll fall under the remit of the personal savings allowance. This means basic-rate (20%) taxpayers will be able to earn £1,000 interest before having to pay tax on it, while higher-rate (40%) taxpayers will be able to earn £500 interest with no tax. Additional-rate (45%) taxpayers don’t get a tax-free allowance.

There is an allowance of £20,000 for the 2022/23 tax year. You must invest in your stocks & shares ISA by 5 April – the end of the tax year – for it to count for that year. Crucially, any unused allowance (£20,000 for 2022/23) doesn’t roll over – so if you don’t use it, you lose it forever.

Any savings or investments that stay within the tax-free ISA ‘wrapper’ will continue to earn interest and reap the tax benefits until you withdraw the money. So it’s possible to end up with substantial amounts invested within ISAs that are completely tax free.

The platform and the funds you invest in will have fees. Many of the newer platforms such as Freetrade and Wealthify have opted for a flat fee. Most investment institutions such as Fidelity, Vanguard and HL charge a percentage fee. This is a percentage of the value of your fund.

The account fee often falls as the value of your fund exceeds a certain value. For example, with Fidelity if the value of your stocks and shares ISA account exceeds £250,00, the account fee will drop from 0.35% to 0.25%.

Many funds also have their own ongoing charge. This is the charge by the actual manager of the fund held within your stocks & shares ISA. This is also percentage of the amount you hold in that fund and can typically vary from 0.05% to 1%+ per fund. Active funds are almost always more expensive than the passive index tracking funds.

Extra Fees To Watch Out For

Funds may also choose to charge you a percentage fee for selling/buying funds and shares. This is known as a transaction fee. You may be charged every time you buy or sell a fund or a shareholding on the platform. These can be anything from £0 to £25. If you plan to be an active trader, looking for a low trading charge should be a high priority.

Platforms and funds may also include an entry of exit fee. This is the cost involved in moving your stocks & shares ISA from one platform (provider) to another. This is usually charged per fund, so the more funds you have within your stocks & shares ISA, the more it’ll cost you.

Many investors attempt to ‘time the market’. This is nearly impossible and the evidence has shown that most active fund managers get it wrong. By selling your position as stocks dip and trying to judge the peak investors lose out on sharp recoveries or see the price go down again.

In March 2020 the S&P 500 stock market index plummeted 30% in a month. Fear ripped through the market. Surprisingly, the market sprung back and gained almost 80% in the by the year that followed.

If you would have panic sold and hid out in cash, you’d have sold at a loss. In an attempt to time the bottom, probably missed out on the gains that followed. Invest on a regular basis would have helped you to capture the market ressurgance. This is known as pound cost averaging. This helps to smooth out any ups and downs.

Deciding which stocks and shares ISA is best to you is a very personal decision. Ultimately, the platform and the fund you choose should be tailored to your personal circumstances. You need to decide on the level of risk you want to take and what your investment strategy is going to be.

You also need to decide on what fee structure will be best for you. Can you save money with investing in a stocks and shares ISA platform with a set fee or will a percentage fee save you money?

The best stocks and shares ISA is often the one that you feel comfortable investing in. If you are unsure, then you should consult a professional. Hopefully, this “best stocks and shares ISA” guide has given you a starting point for trying to find a stocks and shares ISA that meets you needs.