Rishi Sunak’s budget on 3rd March 2021 confirmed that Individual Savings Account (ISA) allowances will stay the same for another year. That’s an overall tax-free investment limit of £20,000 per adult and Junior ISAs for under 18s have a separate £9,000 allowance. But with such a wide choice of stocks and shares ISAs, how do you know where to start?
Although Cash ISAs are the most straight forward and the most popular, you should really consider Stocks and Shares ISAs when investing for periods of more than 5 years.
Also known as ‘Investment ISAs’, these are tax free accounts to place your money into not just shares, but government and corporate bonds, property and a choice of thousands of different investment funds.
Investing in the stock market brings volatility risk into your life, so the value of your savings will move down as well as up on a day-to-day basis. But over the longer term, your money has a better chance of increasing its spending power.
The graph below from investment app provider Moneybox gives an idea of how the growth of £1,000 in cash has compared with the growth of global shares over an 11 year period.
Note that share values move up and down all the time and chances are that over the short term, investments will drop below their original value. But the declines are temporary, and the long-term advance is permanent.
Expect volatility, but the reward is growth potential
Many people are put off from investing into stocks & shares due to the risks involved. That’s understandable and it’s true what all the warnings say. The value of your investments can fall as well as rise and past performance is no guide to the future.
Over the years, I’ve come across many people who have lost out on investments. Usually, it’s because of a lack of diversification (owning shares in just a few or even just one company) or a behavioural reaction, like panic selling when the markets are down.
It often comes down to a lack of knowledge and understanding, and to be fair, we didn’t learn about this at school, so we can hardly be blamed for lacking confidence. No wonder we don’t all know where to start!
But it doesn’t have to be complicated or difficult. It’s now easier than ever to begin building up wealth without having to choose individual companies to invest in. There are plenty of modern and accessible investment providers, ranging from self-select DIY platforms to automated advice or “robo-advice” websites, right through to comprehensive, personalised advice.
Where to start? the choice is yours
It can be hard to know where to begin, but comparison sites are a good start. They let you see the main providers with details of their charges, investment options and customer service standards.
There’s the well-known MoneySavingExpert,com which outlines 3 approaches, depending on how confident you feel:
There’s also the well-established Which? with a host of information and easy-to-follow guidance.
And I like Boring Money with a list of ‘best buy’ ISAs for 2020/2021 as scored by customers.
It’s more than likely that your own bank will also offer access to stocks and shares ISAs, but it’s worth understanding the charges and levels of service before going ahead.
Look at the costs
Charges for stocks and shares ISAs can be a bit confusing at first. You can expect a ‘platform’ charge, which covers administration costs for the provider. On top of this, there will be a fund management fee to cover the actual investment costs of the underlying funds.
For example, Moneybox charges a platform fee of 0.45% of your investment value per year, plus £1 per month. For this, you get a pretty cool app for mobile devices and you can link it to your bank account to round-up your transactions to the nearest pound and invest the difference.
In addition to the platform fee, you would pay investment fund charges of between 0.12% and 0.3%. So overall, you would expect to pay between 0.57% and 0.75% plus £1 per month for a Moneybox ISA. It doesn’t sound much, but over the years, it will have the effect of slowing down the growth of your money.
Vanguard is known as one of the cheapest investment providers. For example, their platform charge is only 0.15% and fund management charges for their LifeStrategy range are 0.22%. But it’s maybe not quite as user friendly for mobile device users.
Wealthify is another modern investment app with charges of between 0.8% and 1.25%, including “robo-advice” to help you select the most appropriate funds.
Understand the risks
ISA providers offer a choice of funds to suit your risk level, from cautious (lower risk) through balanced (medium risk) to more adventurous options.
What this really means is the extent to which you can expect your investment to fluctuate in value. The more you invest in equities (shares) the more you can expect day to day movements.
Investment portfolios often include bonds to help balance out the volatility of shares. Bonds are loans to companies and governments and whilst they also fluctuate in value, they are generally more stable.
Despite the short-term volatility of stocks and shares, it’s worth remembering that relatively ‘safe’ Cash ISAs are not without risks of their own. Over the long term, cash will struggle to keep pace with rising prices. So the spending power of your savings can be eroded over time – this is inflation risk.
In short, there is no ‘risk-free’ option at all, so don’t let investment volatility put you off when it comes to long term planning.
If all of this feels like information overload and you don’t much fancy doing all the research, then financial coaching or regulated financial advice might be a way to cut through to a quicker decision.
Stocks & Shares ISA Restrictions
The annual allowance of £20,000 will be more than enough for most people, but remember, if you don’t use this allowance, you lose it. The annual limit includes payments into Cash, Stocks & Shares, Lifetime and Innovative Finance ISAs.
You can only pay into one of each ISA type per tax year, so although you can own more than one Stocks and Shares ISA, you can’t pay money into more than one during each tax year (6th April to 5th April).
Withdrawals from ISAs are usually easy enough, but take care with investment ISAs. Only invest if you plan to leave the money to build up over several years. You wouldn’t want to be forced into withdrawing money, just at the point where markets take a dip.
More and more responsibility is being placed on us, as individuals, to plan for our financial future. Final salary pensions are disappearing and the state pension is creeping further away from us as the qualifying age increases from 65 to 67 by 2028.
ISAs can be a great way to invest for financial options later in life, with no tax on the growth and no tax when you withdraw money later down the line.
The only problem is, not enough of us are investing for the future. Why not take some time to think about whether or not you’re making the most of your tax-free allowances?