The Complete Guide to Investment ISA accounts

An ISA, or Individual Savings Account, is a great vehicle to invest through because it allows your money to grow free from tax.

Choosing an ISA, can be more complex than just considering which has the cheapest fee. Fees can often be handled differently by different providers so thorough comparison is recommended.

Here is how investment ISAs work, whether they’re right for you, and what to look out for when weighing up the different products on offer.

What is a stocks and shares ISA?

A stocks and shares ISA is an account that allows individuals to invest in stocks, shares, bonds or commercial property without paying any tax on their investments. Every British citizen over the age of 18 can invest up to £20,000 each year in a combination of cash ISAs, innovative finance ISAs and stocks and shares ISAs. Stocks and shares ISAs are higher risk than cash ISAs, but can also produce a higher return.

How do stocks and shares ISAs work?

When you set up a stocks and shares ISA, any investments that you place within it will be exempt from the usual taxes on income or gains. This means that when you sell assets that are held within an equity ISA, there will be no Capital Gains Tax or Income Tax to pay on dividends or corporate bond interest, regardless of whether you’ve used up the relevant personal allowance.

Whether a stocks and shares ISA will be of benefit to you will depend on whether your investments exceed the personal allowances in any of these areas. For larger investors, the tax advantage of a stocks and shares ISA will be significant. For very small investors, their ISA allowance might be better used for a cash ISA.

You can read more on how to compare stocks and shares ISA accounts here

How to set up a stocks and shares ISA

A stockbroker is required to set up and run a stocks and shares ISA. There are a variety of providers who can offer this service but the cheapest are online platforms. You will be charged for using the platform, for buying and selling assets and for the services of fund managers who are managing any funds in which you have invested. There could also be a charge for transferring from one platform provider to another.

What is an Investment ISA?

An Investment ISA is a tax-efficient wrapper that shields your investments from capital gains tax (CGT) and income tax.

Investment ISAs are commonly called stocks and shares ISAs, but in addition to shares you can invest in investment trusts, open-ended investment companies (OEICs), unit trusts, government bonds and corporate bonds.

Each person in the UK has an annual ISA allowance – this is the maximum amount you can invest across all your ISAs (including cash, investment, Lifetime and Innovative Finance ISAs) in any given tax year. The allowance is currently set at £20,000.

You can open an investment ISA through an online investment platform, fund supermarket, bank or stockbroker, directly from a fund manager, or via a financial adviser.

The ability to shelter your money from tax is probably the biggest draw of investment ISAs. If you open one through a self-select, or “DIY”, investment platform it also gives you control and choice over your investments.

It’s important to remember, however, that ISAs attract just as much risk as if you invested elsewhere. If your investments perform badly, you could end up with less money than you originally put in. In some instances it can be difficult to access your money quickly, so it’s best to view ISA investments as long-term investments.

Investment ISA Fees

One of the most confusing aspects of investment ISAs is the plethora of fees and charges levied by providers.

If you’re investing through an online platform or fund supermarket, the first fee to look out for is the “platform” or “custody” fee. This will either be a flat fee, which tends to be more cost-effective for very large sums of money, or a percentage of the value of your shares/funds.

Other fees to compare are the fees for buying and selling investments – these can range from £0 to over £15. If you hold funds, you’ll also pay an annual management charge to the fund manager, and if you’ve opened your account via a financial adviser there will be advice fees to pay.

Comparing the various fees will help you to determine whether your current ISA provider is overcharging you. Providers sometimes change their charging structures so it’s important to make sure it is still as cost-effective as when you first opened your account.

It is possible to transfer your ISA from one provider to another, but you might have to pay exit fees in order to do so. If you’re happy with your investments you can request an “in specie” transfer, which is when all your investments are moved to your new provider. A cash transfer – when your investments are sold and the proceeds passed to the new provider – tends to be quicker but your money will be out of the market, meaning you could miss out on any share price gains.

Should you invest in a stocks and shares ISA?

A stocks and shares ISA can be opened by anyone who is aged 18 or over and a UK resident. You can invest up to £20,000 each tax year across all the ISAs you hold. You could invest your entire allowance in a stocks and shares ISA or split it between other ISAs such as cash ISAs.

You can own multiple stocks and shares ISAs, but you’re only allowed to pay into one of them in each tax year.

Investment ISAs and tax

Investments held within a stocks and shares ISA do not attract capital gains tax (CGT) or income tax. This means investments that pay interest, such as government and corporate bonds, provide tax-free income. If you make a profit when selling your investments, you won’t pay CGT.

Any dividends you receive on shares held within an ISA are also tax-free. These dividends won’t eat into the annual £2,000 tax-free dividend allowance everyone has for non-ISA investments.

If you complete a tax return, you do not need to declare any ISA interest, income or capital gains on it.

Who Are The Best Investment ISA Providers?

You can invest your ISA in a wide range of underlying investments – shares in companies, unit trusts and investment funds, corporate bonds and government bonds.

Once you’ve chosen your provider and opened your account, you can start investing your money straightaway.

It’s important to choose the right type of investment ISA. If you want to manage the ISA yourself, look for a self select or DIY investment ISA. If you want an expert to make decisions for you, a managed ISA would be more appropriate.

Make sure your chosen provider offers all of the products you want to invest in. Some provide access to shares or funds only, while others offer the entire gamut of investment options.

It’s also important to choose a provider that suits your investment style. If you trade frequently, look for an ISA with low dealing fees. If you’re just starting out, choose a provider that offers lots of help and guidance.

An investment ISA will generally be right for you if:

  • You have enough cash in case things go wrong – a good rule is to set aside six months of living expenses;
  • You intend to invest for at least five years; and
  • You’re comfortable with the risks of investing.

Compare stocks and shares ISA accounts here.

The different types of investment ISAs

The two main types of investment ISA are “self select” and “managed”.

A self select investment ISA puts you in complete control of choosing your investments, monitoring their performance and managing your portfolio.

With a managed investment ISA, a team of experts will make all of the decisions about where your money is invested. Some providers have a range of “ready made” investment portfolios which they run on investors’ behalf. Filling in the platform’s online questionnaire will help you to decide which portfolio is most suited to your circumstances.

Choosing a stocks and shares ISA provider

– What to avoid

Don’t choose a platform without understanding all of the charges. This will allow you to compare ISA accounts and pick the one that will best suit your investing style. The transaction fees will be very important for active investors, but much less so for people who take a more passive approach.

– What to look for

Pay attention to the transfer out fee. In general, it is recommended to invest in funds for at least five years in order to smooth out any temporary falls in value. Over this time period, the fees charged by a provider could easily become uncompetitive compared to other platforms.

An example of investing using stocks and shares ISAs

There are many different approaches to investment, but a popular method of reducing risk is to drip feed money into an ISA over the course of a year. This ensures that the investor is protected against drops in the value of the equities. For example, if £5,000 is invested in a fund in March and it drops in value by 20%, then the investor will be left with £4,000. A drip feeder would buy £2,500 in March, which would be worth £2,000 in April, and could then buy a further £2,500 at the lower price. This would leave the investor with £4,500 and a larger stake in the fund than the non-drip feeding example.

Our top three choices for self-select investment ISAs are:

  • Hargreaves Lansdown: the fees are higher than some of its competitors but the provider offers excellent customer service, an easy-to-use website and a wide range of informative guides to help you make your investment choices.
  • AJ Bell Youinvest: a cheaper option, AJ Bell lets you choose between having complete “DIY” investment ISA, one of its six risk-rated passive funds, or one of its four ready made portfolios.
  • iWeb: if you have a large portfolio and/or trade infrequently, iWeb works out as one of the cheapest providers because it doesn’t charge a platform fee.

Managed investment ISA, our top picks are:

  • Evestor: this has one of the lowest platform fees and its investment charges are a maximum of just 0.13%. After completing a questionnaire, you’ll get advice on what to invest in or you can choose from one of three risk levels and have your money allocated to a portfolio.
  • Nutmeg: with Nutmeg you choose a goal, timeframe and amount you’d like to invest and then select your desired risk level. The platform shows what kind of investments it will use to build your portfolio, which is then rebalanced over time. There is a more expensive “fully managed” option, where your investments are proactively managed by experts.
  • Wealthify: backed by Aviva, Wealthify builds an investment plan based on your chosen level of risk and manages it on your behalf. It is really simple to use, making it a good option for beginner investors.

Managing your stocks and shares ISA

You can invest in a stocks and shares ISA for as long as you want to. When you die, it will form part of your taxable estate and it could be subject to inheritance tax (IHT), unless it is passed onto your spouse.

It is best to view your stocks and shares ISA as a long-term investment. Investments like shares and bonds move up and down in price, and the less time you invest for the more pronounced this volatility will be. Most experts recommend investing for at least five or even 10 years.

If you plan to put money into an ISA for a short period of time, you’re probably better off choosing a cash ISA. A cash ISA lets you earn tax-free interest on cash-only savings.

You can transfer from a cash ISA to a stocks and shares ISA by filling out your new provider’s transfer form. If you transfer an ISA that you’ve paid into during the current tax year, you must transfer the whole balance. ISAs from previous years can be transferred in part or whole.

It’s also possible to transfer from a stocks and shares ISA to a cash ISA by contacting the cash ISA provider you’d like to move to. The investments you hold will be sold and transferred as cash.

It isn’t possible to carry forward your unused ISA allowance from one tax year to the next – so if you don’t use it, you lose it. You can invest your allowance as one lump sum or drip feed it regularly each month.

Drip feeding enables you to ride out the ups and downs of the stock market – you buy fewer shares when prices are high and more when prices are low. You could miss out on the full benefit of price rises in the early years, but you avoid the risk of exposing your entire sum to a market crash.

Stocks and Shares ISA gloassary

Tax breaks

Money held in a stocks and shares ISA can grow free from income tax. If you sell investments and make a profit, you do not have to pay capital gains tax.

Annual allowance

You can invest up to £20,000 across all your ISAs each tax year.

Range of assets

You can invest your stocks and shares ISA money into shares, investment trusts, open-ended investment companies (OEICs), unit trusts, government bonds and corporate bonds.

Self-select ISAs

Self-select ISAs give you complete control over choosing your investments, monitoring their performance and rebalancing your portfolio.

Dividend tax

Any dividends you receive on shares held within an ISA are tax-free.

ISA charges

Charges vary considerably from one provider to the next, but will usually include a platform fee, trading fees and fund manager fees. Some providers also charge exit fees.

ISAs Compensation scheme

Investments held in a stocks and shares ISA are covered up to £50,000 if the platform or broker enters default. You aren’t covered for any losses you make as a result of your investments performing poorly.

Stocks and Shares ISA Investing FAQs

Who is responsible for my investment ISA making money?

Unless you invest through a managed ISA, where experts choose and monitor your portfolio, you have sole responsibility for your ISA making money.

Is my money protected in an investment ISA by the FSCS?

Investments held in a stocks and shares ISA are covered up to £50,000 if the platform or broker enters default. You aren’t covered for any losses you make as a result of your investments performing poorly.

How many stocks and shares ISAs can you have?

You can own multiple stocks and shares ISAs, but you’re only allowed to pay into one of them in each tax year.

The maximum contribution limit for each financial year is £20,000. This £20,000 can be split as you like between one investment ISA and one cash ISA.

You can keep both cash  and stocks and shares ISA accounts open from previous financial years alongside your new ISAs but you will only be able to pay into one of each type in the current financial year.

Old ISA account interest rates and charges and fees can change. So it is worth checking the terms and conditions of each account you have open carefully so you don’t end up paying more or earning less in interest.

How can you track the performance of an investment ISA?

By logging into your ISA account you can view the performance of each underlying investment and the overall performance of your portfolio. Some providers offer charts showing how your portfolio has performed over time.

Are you guaranteed to make money with an investment ISA?

No – as with any investment, you could end up with less money than you originally invested.

What if an Investment ISA looks too good to be true?

Be careful, if you are worried read our guide on how to spot investment ISA scams

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