Rebecca O’Keeffe from Interactive Investor Discusses the Benefits & Risks of Stocks and Shares ISAs

In this episode of Good Money Guide TV we talk to Rebecca O’Keeffe from Interactive Investor and discuss the Pros and Cons of investing in Stocks and Shares ISAs. We cover, who they are good for, what Interactive Investors offers through their SIPP account and look at the risks and rewards of investing in Stocks and Shares ISAs.

Good afternoon. Welcome to this episode of Good Money Guide TV. Today, we’re with Rebecca O’Keeffe from Interactive Investor. We’re going to talk about stocks and shares ISAs, what are they, what are the benefits, what are the risks, what can you have in them, and who they’re for. So Rebecca, nice to see you. Thank you very much for joining us. Lovely to be here. Do you want to initially talk us through exactly what an investment ISA is or a stocks and shares ISA is, and how it differs from a normal ISA? Okay. So an investment ISA, or more commonly known as a stocks and shares ISA, is an individual savings account within which you can invest. That possibly doesn’t actually necessarily give you a great definition, but an ISA itself is just a tax wrapper. So within which you can choose how you want to invest, and again, most stocks and shares ISAs now allow you to invest across a broad spectrum of different investments, including funds, investment trusts, ETFs, individual stocks and shares, and even international stocks and shares as well. So you are the one that does the actual selection. You choose. But it is slightly different to a pension in that unlike a pension, where you get tax relief on the way in, there are no upfront tax advantages of investing in an ISA, however, it is almost free from further tax, so I’ll come back to the almost bit. Well let’s move on to the tax issue because that’s one of the major benefits, isn’t it? So what would you say are the major benefits of a stocks and shares ISA? The major benefit of a stocks and shares ISA is that it’s almost entirely free from further tax. The only exception to the free from further tax is that there may be withholding tax on foreign stocks that you own within your ISA, but other than that, any dividends you receive, any interest on cash, any capital gains you make, you don’t have to pay any tax at all. Another benefit is that it’s not declarable, so that means that you can effectively create an income stream for yourself. A lot of people look at ISAs and think to themselves, oh, I’ve got a capital gains allowance, I’ve got a dividend allowance; why would I want to invest in an ISA? And it is relatively true that over a single year, the benefit of an ISA is fairly limited. But it’s the idea that if you’re investing in an ISA every year and you can create an income to go alongside a potential pension income, which is taxable, then that way, you can become hugely tax efficient and choose how to manage your income in retirement to pay the minimum amount of tax that you can. And of course, one of the other advantages is that it’s accessible, unlike a pension. Very good point. Unlike a pension where you have to wait until at least the age of 55 and that is increasing. With an ISA, you have full accessibility all the time. So that does mean that you might be tempted to take money out, but of course, once you’ve taken money out of the ISA, it loses its tax efficient status, but for the majority of people who are happy to invest in an ISA year in, year out, with potentially a life goal or a target in mind, or as a way to supplement the years between when they actually retire or when their state pension kicks in, or even just to actually supplement their retirement income, it is a really good thing to be able to access your money. The other thing that’s important to note is that an ISA is unlimited in terms of its investment potential. With a SIP or a pension plan, you have an overall lifetime limit, and that can potentially subdue people’s enthusiasm for investing in a pension. Whereas an ISA, you can invest as well as you like, hopefully, and there is no limit to how much you can have in an ISA – well, at least for the moment anyway. And the disadvantages, of course. Let’s talk about them. Are there any limitations to what you can have in there in terms of assets or how much can you put into it? So there used to be sort of specific investment limits but actually, now, it is pretty much a case that you can invest whatever you like within an ISA. The only exception being that you can’t actually hold foreign cash. So in the main, you can pretty much hold whatever you want to hold in an ISA, so whether that’s stocks and shares, UK, international, anything else. Of course, that comes with performance risk if things don’t necessarily go your way. And sort of important factors to bear in mind are that you should try and be as diversified as possible, and the longer you have to invest, the less risk you take when it comes to investing in stocks and shares. And in fact, that’s one of the key differences between a normal savings ISA and an investment ISA. With the savings ISA, your money’s there in cash, quite often not earning a huge amount of interest, but with an investment ISA, obviously investments can go up. You’ve got a huge amount of capital appreciation potential. But because you’re managing your own investments, if you don’t do it sensibly, you can lose all your money, can’t you? Hopefully not all but yes. That’s absolutely correct. So yes, it is absolutely important to note that you are the one that’s responsible for investing in your own ISA. You do, in terms of limits, have £20,000 annual limit, as an adult, and if you have kids or even grandkids, you can invest in a junior ISA. With a junior ISA, the parents or guardians are the ones that have to set it up, but after that, other people can contribute to it, and again, that can be a really good way of giving kids an interest in the markets. It’s interesting, children and wealth management and investing. There’s been a big push this year for should we be so commercial about Christmas or should we be investing in our children’s future. And we talk to quite a lot of people about whether or not people should have ISAs, which of course are accessible when they’re 18. So you know, you put 20 grand in a child’s ISA and then give to them at 18. Is that a sensible thing to do or should we be teaching children about wealth management and investing in school so they can responsibly manage their own money? These are all really key questions, and of course, one of the big concerns when you invest in a junior ISA is that you’re worried that your kids or grandkids are going to buy themselves a motorbike when they’re 18 and that’s definitely not something. But interestingly enough, and I have kids who are no longer junior ISA holders, who have migrated to the full-blown ISA side of things… Because of course, when it migrates, it’s their money, isn’t it? It is their money. You manage it, you control it until they’re 18. Absolutely. And then they become adults and responsible. But actually, since they were about 14, they were making investment decisions. And whether that was should I purchase Dominos or Pokémon is all the rage, or even Fortnite and buying Tencent, it’s actually quite an interesting thing to engage with your kids about what they’re doing. And certainly, when it comes to teenagers, they can often be very knowledgeable about what’s in and what’s out, especially when it comes to social media and platforms and everything else. So sometimes, you overlook teenage trends at your peril when it comes to investing. So for anyone who’s not got an ISA, an investment ISA at the moment, who just has a general stock-brokeraging account, they’ve got some investments, what should they do? Is there a way for them to switch that into an ISA to become more tax efficient? Yes. So one important point to note with an ISA is that if it’s not already tax wrapped in an ISA, so if you already have an existing ISA and you want to transfer it to somebody else then that’s fine. It retails its tax status. But if you hold investments outside an ISA, you’re not allowed to just simply put those investments in. So any new money that’s made into an ISA or an ISA subscription has to be made in cash. But that doesn’t mean to say that you need to find new money per se every year, because if you’re sitting on unwrapped or non-tax-efficient investments, they can often be a very good way to look at how to manage funding your ISA contribution. So there is something called a bed and ISA, which is where you sell the holdings outside of the ISA and you buy them back in the ISA straight away. That minimises the exposure to the markets, because obviously, you are doing the two trades pretty much simultaneously. You will never buy back quite the same amount, because obviously, if you’re buying back shares, you’ve got stamp duty to consider and there will potentially be a bid offer spread. But it can be a way of effectively making non-tax-efficient investments tax efficient, because that’s what you want to do. The vast majority of people don’t have £20,000 lying around to put into their ISA every year. So looking at investments that aren’t tax efficient and using those as a potential source of how to get more money into your ISA is a good starting point. Okay, that’s interesting. So let’s just talk about the process involved in that. It sort of sounds relatively arduous but is it in fact? Can people just phone up? If say they’ve got some stocks in an account… Yeah, absolutely. In fact, you don’t even need to necessarily phone up. You can click on a bed and ISA page. You can choose to log into your account and select the stock that you want to sell in your trading account and repurchase in your ISA. And it’s all done pretty much instantaneously. So that’s good. So there’s no price risk, there’s no danger that a stock could move whilst this is being done? No. So it is done simultaneously, so you eliminate the price risk side of things. The only caveat I would say is that there are occasions where if you’re holding a very small cap stock, where the spread might be significantly wider than normal, so when you’re talking about a bid offer spread on a FTSE 100 stock, it tends to be tiny, so you’re actually excluding the stamp duty aspect of it, you tend to be buying back approximately the same number of shares as you’re selling, but with a stock that is smaller and has a much wider bid offer spread, quite often, that might be a situation where you would actually ring your broker because they might be able to deal it in the market with a market maker better than you could do it online. We’ve touched on the advantages; what about the disadvantages of bed and ISA? Again, the disadvantage is really the idea that you’re going to buy back slightly fewer because you’ve got to pay commission on the purchase, though typically, bed and ISAs mean that you don’t pay commission on the sale, and that you’ve got stamp duty. And as I say, the biggest single risk is that the bid offer spread is higher than you might like. So in those instances, it’s very useful to think to yourself should I be contacting my broker rather than try and do this online, or is there a different more liquid stock that I might be better off selling and repurchasing in my ISA. Well I think that’s one of the important things to point out about some brokers as well is that having someone you can talk to on the phone is very important. Absolutely. I mean in a lot of ways, the online world is now such that if you have to ring your broker, you almost have done something wrong. As the provider, you’re sort of thinking to yourself. So I love all these stats about we answer the phone in 15 seconds, because I’m thinking to myself, that’s great but I actually don’t want to ring you. Fundamentally, having an online account and being sort of able to trade yourself should mean that you don’t have to call us. I should caveat that by saying we are there on the other end of the phone and we’re very friendly and very nice, and if you need to call us, absolutely do. I was a broker for many, many years and we’d never hear from some clients and then the only time they’d ever phone us up was when there was a problem, but at least problems can be dealt with when you can speak to someone. I think all the online execution only brokers that don’t offer phone support, it must be very frustrating. I mean there’s no way that you would want to really have an account unless you could actually talk to somebody and get the reassurance. And for some of our customers, that’s a vital part of the service. But for most people, the online space is their world and it should be that they have the reassurance of knowing that there is somebody there to talk to if they need to, but they’ll probably be keeping their fingers crossed that they won’t need to contact you. With you in particular, does it cost any more to talk to people over the phone? Do phone transactions cost more than online transactions? Yes, phone transactions do cost more. The only instance where they don’t cost more is if you can’t trade a particular thing online, in which case calling us, we’ll execute at the same price as the online trade. And on fees, what should people be mindful of in terms of fees when they’re looking at stocks and shares ISAs? So again, the big single thing to look at is a) the value of the underlying costs of the investments that you’re holding, so that’s do you want to be investing in passive funds or active funds, and are the active funds worth the premium over the long term. And they of course are attached, that they have management fees attached to them, don’t they? But stocks and shares don’t. No. Stocks and shares don’t. So if you are holding a basket of stocks and shares in your account then the big thing to note is a) how much commission you might pay to buy those stocks and shares, and the second really important point is whether your provider is a percentage fee provider or a flat fee provider. And in terms of percentage fees and flat fees, if you’re just starting out and you’ve got a small number of assets, the chances are a percentage-based provider is the way to go. And if you’ve got a large number of assets or large holdings or you’re a frequent trader potentially, then flat fees can very often be highly economic. I mean certainly from our point of view, we’ve had independent research done that suggests that you can save tens of thousands of pounds if you have sizeable assets rather than pay a percentage-based fee. So one final point, you’ve got the Interactive Investor Super 60, the II Super 60. Do you want to briefly tell us what that is and how it can help your customers? So the II Super 60 is a rated fund list, compiled by a panel of experts within II. Two big points to note are that there aren’t any conflicts of interest or commercial considerations that come into play, and the second is that it contains funds, ETFs and investment trusts, so that we cover the entire spectrum of available assets, rather than just concentrate on the funds industry, which tends to be where rated funds go. Obviously, from the point of view of different customers having different requirements in terms of where they want to invest and how they want to invest, we provide lots of fact sheets and information and tools and filters so that investors can choose to try and find the right investment to suit their own risk profile or what they want to do or how long they’ve got to invest. So there is a lot of information out there for investors from a variety of different resources. In theory, it has never been easier to invest. That might sound quite trite but the reality is that there is a huge amount of information online, huge amount of resources. So even though it might appear to be scary and certainly from the point of view of people who’ve been investing perhaps in cash ISAs all their life, the idea of investing in stocks and shares might be an anathema. They might think to themselves I really don’t want to do this. It’s still actually… over the long term, investing in shares is proven to deliver better returns than any other asset class. So certainly, it’s something that people should consider, rather than sitting cash, which is losing money in real terms. Where do you think people can go to get guidance and advice and information on where to invest? Any websites you can recommend? Obviously, Interactive Investor. You’ve got a great forum. I’ve probably been looking at your forum for 20 years. It’s always great fun; there’s a lot of characters on there. But aside from Interactive Investor, where should people go? Well certainly, you’ve got the Weekend Press, which tend to do good money supplements, and that’s always a good starting point because they cover off the big, broad stories that are happening. You’ve got other websites that are the data providers. For example, Trustnet or Morning Star, and they can be very useful as a way of looking at funds and fact sheets and getting all of the information that you need. There are lots of brokers and other places that will provide you with the information you want. I promise you, if you have heard about a particular fund or stock and you put it into Google, you’ll probably have a couple of million ways in which you can actually look at it. But certainly from the point of view of those online blogs, podcasts, videos, all of which are now designed to really provide a credible source of information for you if you’re trying to make an investment decision. Okay, excellent. Well Rebecca, thank you very much for your time. Thank you very much for watching this episode of Good Money Guide TV. We’ll be back talking about another asset class shortly. Thank you.

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