Choosing a stocks and shares ISA: An essential guide
Breaking into the world of investing is easier than it used to be, but it is still a minefield. There is a plethora of investment tools, accounts, and other financial instruments; where does a new investor begin? The ISA is a great starting point.
What is a stocks and shares ISA?
An ISA is an Individual Savings Account for investors who are planning to invest up to £20,000 a year. Any profits you make on money that you invest from your ISA will be exempt from both income and capital gains tax.
You can open an ISA with as little as £25, although this varies between providers. You can deposit money into an ISA account just like you would with a regular bank account, up to a limit of £20,000. If you exceed this limit accidentally then you won’t be entitled to the same tax benefits. However, if this occurs then HMRC should contact you at the end of the tax year and explain what you need to do. HMRC’s official ISA advice is to not attempt to fix the issue yourself and to wait for HMRC to get in touch with you.
Despite the name, a stocks and shares ISA is suitable for investing in a range of financial products, not just stocks and shares. You can also use the funds in a stocks and shares ISA to invest in corporate and government bonds, as well as exchange-traded funds, investment trusts, and similar financial products.
What Are the Limits?
Remember that your ISA has a £20,000 limit. You are allowed to have more than one ISA, but the limit applies across all of your accounts. You can have 5 ISA accounts and divide your £20,000 among them however you wish. You won’t get a limit of £100,000.
Some ISAs are ‘flexible’ accounts. This means that you can withdraw money from them whenever you like and for any purpose. However, you have to repay any money withdrawn within the same tax year. If you don’t, you will have to repay the money along with a penalty. If you withdraw money from a non-flexible ISA then you will have to pay a penalty, which will be detailed in your contract.
Money that you deposit into an ISA to repay money that you have withdrawn will not count against your overall allowance. So, if you have £750 allowance remaining and you withdraw £50 from your account, your remaining allowance is still £750. However, the first £50 that is deposited into your account will be used to repay your £50 withdrawal, so you can deposit £800 without exceeding your allowance.
Understanding the Risks
Before you commit to an ISA, it is important that you have a solid investing plan. It’s fine if this is going to be your first experience of investing, but you need to know what you are doing or have someone to guide you. No investment is entirely risk-free. There are some investments that are safer than others. Generally, the returns that you can expect are relative to the risk that you take. In other words, safer investments tend to pay out smaller returns more reliably.
If you just want to grow your money without the risks that come with investing, you should get yourself a standard savings account. These give you a fixed interest rate and you are guaranteed to receive that return on your money. Stocks and shares ISAs are for people who are going to be investing their money.
Choosing a Provider
There are a plethora of providers offering stocks and shares ISA accounts today; choosing the right one can seem daunting at first. Some people find it easiest to take the path of least resistance and will open an ISA with the bank that they use for their personal banking. For some people, this will work fine but you might be able to find a better deal if you are willing to step outside of your comfort zone and find a provider who isn’t on the high street.
For example, there are businesses like willisowen.com that cater specifically to people who are looking to make their first forays into the world of investing. Choosing a provider that caters specifically to first-time investment enables you to take those tentative first steps with more confidence. They also offer a flexible stocks and shares ISA, meaning that you can withdraw money from it without penalty, provided you pay it back within the same tax year.
If you are looking to learn the ropes of investing or you have been studying markets from afar and are now ready to finally take the plunge, an ISA is a great choice. You can start buying shares with as little as £25, depending on the provider, so there is plenty of scope for you to dip your toes in the water. Just make sure you do your research so you know exactly what you are getting into.
