What is an ISA? And, What are Stocks and Shares ISAs?

Ian Lewis[1]

Ian Lewis

Money Savings Advice What is an ISA? And, What are Stocks and Shares ISAs?

Many people are afraid of investing. The risks of investing are well publicised, and the world of investments can seem confusing if you're new to financial decisions.

One of the most popular ways to invest is to apply for a Stocks and Shares ISA. You can use an ISA to set money aside, protecting it from the taxman.

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What is an ISA?

An ISA, or Individual Savings Account, is known as a 'tax-free wrapper'. The money you invest can earn interest and grow without that interest being taxed. In many cases, investing in an ISA is a sensible financial choice. You could get more for your money than you would if you stored it elsewhere.

What Are the Benefits of an ISA?

An ISA protects your interest from the taxman. Whilst you're usually taxed on all your earnings, including your bank account interest, money that's stored in an ISA earns tax-free interest payments.

What Are the Drawbacks of an ISA?

There are limits to how much you can add to your ISA each year. These limits can change annually but are around £20,000 currently. Any money you've paid remains in your ISA, but each year you can only add additional money up to your annual limit. You'll only have one ISA limit. If you have multiple ISAs with one or more providers, you can still only add up to £20k per year in total.

How Do ISAs Work?

When you open an ISA, any money you pay in will be earning interest tax-free. You can, however, only pay in money up to your annual limit.

If you open an ISA this year and contribute the full £20k, this money remains in your account until you choose to withdraw it. For as long as it's in there, this money will be earning you interest. Next year you can add another £20,000, on top of what's already saved. Then, you'll earn interest on the full £40k, and that interest will always be tax-free. Each year you can add more money, up to the annual limit. The annual limit is not affected by what's already in the account.

Can You Withdraw Money From an ISA?

You can withdraw money from your ISA. Any money you withdraw does not contribute to your annual limit.

Assuming that your annual limit is £20,000, you might add £5,000 at the start of the year. If you withdraw £2,000 later, you'll still be able to add another £17,000 within the same financial year. You don't get just one chance to add the money because any withdrawals will be deducted from the amount you've paid in that year. In this case, after your £2,000 withdrawal, it would be as though you'd only deposited £3,000.

What Is a Stocks and Shares ISA?

There are two different types of ISA. A Cash ISA is more like standard savings account with a set rate of interest. A Stocks and Shares ISA is an investment product where deposits are invested in the stock market, and you don't pay tax on your returns.

Stocks and Shares ISAs aren't risk-free. You could lose money if your investments don't do well, so you might get back less than you paid in.

If your investments do well in a Stocks and Shares ISA, you'll likely earn more than if you'd put your money into a standard Cash ISA.

Whether you choose a Cash ISA or a Stocks and Shares ISA, your annual limit is the same.

Is a Stocks and Shares ISA for Short-Term or Long-Term Investment?

If you're going to invest in the stock market, you must be willing to ride the waves. Investing your money long-term is usually the safest way to help your money grow.

Many people choose Stocks and Shares ISAs when they're not in a rush to get their money back. You could use this type of ISA to save for your retirement or for a long-term goal like buying property, rather than investing for just a year or two for goals like paying for a car or a holiday.

If you invest in a Stocks and Shares ISA short-term, you're likely to see that market fluctuations feel big and have considerable impact. You might lose a lot of money in the first few months, but you could find that your investments recover if you leave them alone. It's advisable to only invest in stocks and shares if you don't panic at the first sign of trouble. Give your investments time to move up and down; then, they're likely to grow over time.

Studies have shown that almost 90% of investments have a positive return after 10 years. There's a chance your investments won't do well, but it's far more likely that you'll come away with more money than you put in.

Is There a Fixed Interest Rate for a Stocks and Shares ISA?

Whilst Cash ISAs have a fixed interest rate, a Stocks and Shares ISA does not. You'll make money if your investments do well, but you could lose some money if they don't. There's no guarantee that your money will grow.

Stocks and Shares ISAs With Cash ISAs

Though you have an annual ISA limit, you can spread this across multiple financial products. Many people choose to use a Stocks and Shares ISA as well as a separate Cash ISA.

If you plan to have both types of ISA, investments in your Stocks and Shares ISA should be made with your long-term goals in mind. A Cash ISA's better for a short-term investment, so having both products could help you to plan for the next few years and far beyond them.

Should Everyone Have an ISA?

If you’re saving money, it’s usually a good idea to apply for an ISA. Since the ISA acts as a tax-free wrapper, you’re likely to get more from your money than you would in other savings accounts. However, that doesn’t mean that everyone should have an ISA.

If you don’t have a lot of spare money, storing it away in an ISA is usually not the best idea. You might prefer to put your money in instant access savings, so you can quickly withdraw it when you need it. Even Cash ISAs, which are better for the short-term, aren’t ideal for your day-to-day saving.

If you have spare money sitting around, and no plans to use it in the near future, then an ISA might help you to maximise the growth of your savings. If you have a debt to pay off, or if you often need to dip into your savings for purchases you make through the year, then it may be better to keep your money elsewhere.

What Can I Invest in With a Stocks and Shares ISA?

A Stocks and Shares ISA is an investment product, which means that your money will be invested in company shares on the stock market.

Different ISA providers will allow you to invest your money in different companies and industries. In most cases, you’ll choose a general package of investments. This is called a ready-made portfolio. If you want a lot of control, you might be able to be a lot more specific about where your money is invested.

Most people choose from one of several ready-made portfolios, choosing the option that best meets their needs or suits their attitude to risk. A bigger risk means you have a higher chance of losing money, but you’re likely to earn more if your investments end up being successful. Less risky investments are obviously safer, though they don’t usually grow as quickly. Instead of basing your decision on risk and potential growth, you might instead choose a portfolio where all funds are invested in ethical, sustainable businesses. Alternatively, you might choose to invest your money in small business or specifically in government bonds.

For those that want them, Shariah-compliant Stocks and Shares ISAs are available. With these, money is only invested in Shariah-compliant companies.

Diversifying Investment

There are risks to investing all your money in similar companies and industries. Diversifying your investments is very important, especially when dealing with large amounts of money, as it means that one industry’s failings won’t affect every bit of money you’ve invested.

Where possible, you should spread your investment across various different companies, industries and geographical locations.

What Fees Are Associated With a Stocks and Shares ISA?

If you have a Stocks and Shares ISA, there are fees you’ll pay for your account. The fees you’re charged will be usually be applied annually.

Different Stocks and Shares ISAs have different fees, so it’s important to be aware of what you’ll be charged to maintain your account. Often these fees are charged as percentages, but sometimes there may be a flat fee.

Before choosing a Stocks and Shares ISA, look into the fees and see how much you’ll be charged for transactions and for keeping your account. Make sure that fees and charges won’t wipe out the money you’ll be earning with your investments.

Most providers have a platform charge just for maintaining your account. If you won’t be investing a lot of money, it’s better if this is charges as a percentage of the value of the funds in your account. A flat fee could mean that you’re being charged more than you’re investing in the first place. If you plan to invest a lot, a flat fee may be better as this puts a limit on how much you’ll be charged whilst percentage-based fees just keep growing.

You may need to pay a management charge for the work that goes into managing your investments and moving them around if it’s required. This is almost always a percentage-based fee.

If you plan to take control and buy and sell shares and funds, make sure you’re aware of any trading fees that you’ll pay when you’re moving your money.

You might also pay fees to withdraw from your ISA or transfer from one provider to another.

Active vs Passive Funds

When you invest in a Stocks and Shares ISA, you can choose an active fund or a passive fund. Most people will choose a passive fund.

With a passive fund, your investments track the market index, and everything works automatically. With an active fund, you’ll have a fund manager who makes decisions on your behalf. A fund manager watches the stock market, deliberately investing your funds in companies expected to perform better than average. Obviously, having a real human making decisions is expensive. An active fund is a costly investment, and for ISAs, this option is rare.

High fees are charges for active funds, so most people choose a passive fund ISA, and this is the industry standard.

What Is the Difference Between, DIY vs Do-It-With-Me vs Do-It-for-Me?

How much control do you want over your own ISA investments? With Stocks and Shares ISAs, there are several different ways to invest your money.

DIY Investment

If you know a lot about investments already and have plenty of experience, you might choose a DIY investment opportunity. With this type of platform, you can actively build your own portfolio.

If you take the DIY route, you’ll be able to research all different companies and industries. Then, you can choose exactly where your money is invested. If you choose a DIY platform, then you’re wholly responsible for your investments. As well as investing your money, you’ll need to invest a lot of your own time into monitoring stock market changes.

Do-It-With-Me Investment

If you want someone to hold your hand, but would like to have a bit of control, then you might choose a platform that narrows down your options or gives you a selection of portfolios. You can choose the most suitable portfolio based on your attitude to risk, or you can choose your preferred portfolio based on where your money is invested. If you specifically want to invest in green industries and sustainable and eco-friendly companies, or if you want to invest in small businesses or in government funds, you’ll be able to select the portfolio that best meets your needs and requirements.

Do-It-For-Me Investment

If you really don’t want to make any decisions, you can find a platform where all the hard work is done for you. You might be given a survey that aims to find your existing attitude to risk; then, your money will be automatically invested in a suitable portfolio.

On a platform where everything’s done without your input, charges may be relatively low. This is because there’s an automated process, and these platforms tend to take the easy route. If you want the best chance to grow your money, you can still take risks with your investments just like you would with other platforms.

What Is the Limit on How Much You Can Invest Each Year?

Every year, you have an ISA allowance. This is the total amount of money that you can put into your ISAs. Your ISA limit doesn’t include money you’ve already invested, so the money you deposited in previous years is still safely wrapped up in your ISA.

You can have a couple of different Individual Savings Accounts. However, your ISA allowance is attached to you and not to an account. No matter how many ISAs you have, your total allowance stays the same. If you want to invest in a few different accounts, you’ll need to split your allowance.

ISA allowances can change each year, but they usually stay roughly the same. Since 2017, the annual limit has been £20,000 per year. Prior to this, there was a limit of around £15,000 annually since 2014.

When Does the ISA Financial Year Start?

The financial year starts on 5th April. This means that your allowance runs from 5th April one year until midnight on the 4th April the following year.

On 5th April your annual allowance resets. Any money already stored in your ISA is safely locked away in your account, and you can start contributing again with a fresh start on your yearly allowance.

Withdrawing Money From a Stocks and Shares ISA

If you plan to withdraw money from a Stocks and Shares ISA, be aware of any fees and charges. Most providers will charge a transfer or withdrawal fee. Usually, this is around £50 though some providers don’t charge as much. Your chosen provider might not charge this fee at all.

Withdrawing from an ISA frees up space in your annual ISA allowance. If you deposit £6,000 and then withdraw £3,000, your £20,000 allowance returns to a position where you have £17k remaining. You can then put the same money back in future.

Stocks and Shares ISAs are classed as flexible product. You can withdraw your money at any time, though you might have a fee to pay for doing so. You’ll withdraw your money by selling your shares and transferring the proceeds to your bank account.

Be aware that market fluctuations will make your investments rise and fall. In order to profit from your investments, you’ll need to sell your shares at the right time. Many people feel confident when first investing but panic if their savings decrease. Panicking can lead to withdrawing money at a time when you’ve lost out financially, so try to keep your money in your ISA wrapper until any sales will be profitable.

Tax-Free ISA Withdrawals

The money you withdraw from your ISA remains tax-free at the point of withdrawal. It doesn’t need to be declared on income tax forms, and you won’t pay tax on the profits you make from your investments.

How Long Will a Withdrawal Take?

If you want to withdraw money from your Stocks and Shares ISA, be aware that this process isn’t instant. A withdrawal involves the sale of shares, so it can’t happen straight away. Usually, it takes between 3 and 7 days to withdraw money from a Stocks and Shares ISA.

Check the terms and conditions of any ISA product to see how long withdrawals will take. This should factor into your decision when you’re first choosing an ISA.

What Is the Average Return on a Stocks and Shares ISA?

In recent years, most Stocks and Shares ISAs have been very successful. In the 2017/18 tax year, the research found that average returns were around 4.80%. The following year, they were still above 4.00%. Average returns from 1999-2020 are said to have been above 5%.

Not all Stocks and Shares ISAs are successful. Some people will lose money. Whilst everyone hopes that their investments work out, you must be aware that you could be one of roughly 10% that see a loss over 10 years.

Be prepared for large fluctuations whilst your money’s in a Stocks and Shares ISA. Selling your shares at the wrong time could result in financial loss. It’s typically advised that Stocks and Shares ISAs should be used for long-term investments, as keeping your money invested for longer can help you to ride the highs and lows.

Can I Have Multiple ISAs in One Year?

It is possible to have multiple ISAs. However, be aware that your annual allowance is linked to you and not to your ISA. You don’t get a new annual allowance with each ISA product you take out.

Your annual allowance remains the same, no matter how many ISAs you have. Your allowance must be split across all your ISA products, so you can still only make deposits up to your yearly limit. If you have a £20,000 annual limit and have two separate ISAs, you might put £10k in one and £10k in another. You could, alternatively, deposit £18k in one and just £2k in the other. It’s up to you how you split your deposits, but you must not go over your limit.

Many people choose to have a Stocks and Shares ISA but also have a separate Cash ISA. It’s wise not to put all of your eggs in one basket when using a Stocks and Shares ISA. Stocks and Shares ISAs can result in financial losses, so it’s advisable to keep money elsewhere and only invest what you can afford to lose.

Having both a Cash ISA and a Stocks and Shares one can also help you to manage your money both short-term and long-term. Cash ISAs can come with instant withdrawals if you choose a flexible product, and there’s no risk that your ISA will contain less than you’ve deposited into it. Meanwhile, Stocks and Shares ISAs have slower withdrawal times, and you might go through stretches of time when your investments have resulted in losses.

Does Transferring an ISA Count As Opening a New One?

You can transfer money from a Cash ISA into a Stocks and Shares ISA. You can also transfer from Stocks and Shares to Cash, though this process can take a bit longer. You’ll also have the option of transferring from one Stocks and Shares ISA to another.

Sometimes, people transfer their ISAs to different products with the same provider. Sometimes, transfers are from one provider to another. There may be fees for transferring an ISA, though not all providers will charge these.

You can transfer in or out, and transferring an ISA does not count as opening a new one. You can transfer an ISA at any time and can also open a new ISA in the same year.

Reasons to Transfer an ISA

You might transfer an ISA if you think you’ll get better returns elsewhere. You might also transfer if you’re unhappy with the provider you’re currently using.

Transferring might be beneficial financially, but there’s a chance it won’t work in your favour. Before you transfer your ISA, make sure you’re aware of any fees that you’ll be charged. Sometimes, ISA transfer fees wipe out any savings you’d make.

It’s a good idea to monitor the market and check what providers are offering. There may be a new ISA that better meets your needs, or your needs might change so that your existing ISA is no longer the best fit for you. You’re free to transfer at any time and as many times as you want, so there’s no need to settle for any ISA product that isn’t performing well for you.

ISA Transfer Service

You should never withdraw money from one ISA with a plan to deposit in another. This could lead to the loss of tax-free benefits.

ISA providers have their own transfer services. However you’re moving or transferring your ISA, always use the transfer service rather than doing things yourself.

ISA Transfer Rules

You can only open one new ISA per year. If you’ve already opened an ISA in the current financial year, then you must transfer all the money from that ISA if you’re transferring elsewhere.

You can choose to transfer part of your ISA, rather than the full amount, as long as it’s not a new product. You don’t have to transfer everything out and completely close down existing ISAs.

Stocks and Shares ISA Transfer Fees

As well as standard transfer fees, Stocks and Shares, ISAs might have other transfer fees applied. Some providers will charge a separate fee for each fund or share investment you’ve made, and this can result in some very high charges if you want to move your ISA elsewhere. If you notice your provider charges per-fund fees, and if you have the option available, consolidate investments into one fund or company before you start your ISA transfer.

If you’re doing this, you must get your timing right because having all investments in one fund or company is a very risky endeavour. Don’t leave your investments in one place for any longer than you need to.

ISA Transfer Times

An ISA transfer doesn’t happen instantly. Though the process is relatively simple, it can take up to 30 days. It takes longer to transfer out of a Stocks and Shares ISA than it does to transfer out of a Cash one. Most transfers from Cash ISAs are complete within two weeks, whilst Stocks and Shares ISA transfers can take up to a month.

How to Start an ISA Transfer

To start an ISA transfer, decide where you’re transferring to. This could be a new provider, or it might be a new product with your existing provider. You’ll also need to choose a product or portfolio to transfer money into.

Initiate an ISA transfer by contacting your target provider. Tell them that you want to transfer to them, then fill out an ISA transfer form. The new provider will manage the transfer, contact your existing provider, and claim the money from them.

If you feel that the ISA transfer is taking longer than expected, it’s possible to make a complaint to the Financial Ombudsman. Wait at least 30 days before you complain about ISA transfer delays, as the transfer might take up to a month if you’ve got stocks and shares that must be sold.

What Is the Minimum Investments in Stocks and Shares ISAs?

You don’t need to invest a lot of money to get started with a Stocks and Shares ISA, but be aware that flat fees might eat up any smaller investments you make. If you don’t have a lot to invest at first, choose a provider that charges percentage-based fees.

You can start investing in a Stocks and Shares ISA with as little as £25, though your provider options will be limited. The more you can invest initially or monthly, the more products will be available, and the more providers will be happy to have you as a customer.

Even investing a small amount monthly can result in great returns over time, so you shouldn’t feel like your small amount of spare money is an insignificant amount. If you have any money that’s completely spare and that you won’t need to spend on other things, it may be worth investing in a Stocks and Shares ISA. Make sure that any money you invest is money that you can cope with losing, but cross your fingers for successful investments and great returns on your deposits.

How Can Money Savings Advice Help You if You Are Thinking About Investing in an ISA or Stocks & Shares ISA?

Here at Money Savings Advice, we have partnered with some of the UK’s leading ISA & Stocks & Share ISA Investment companies. They have already helped thousands of people invest safely and they can do the same for you.

Choosing an independent investment company means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these investment specialists, then click on the below and answer the very simple questions.

Money Savings Advice Author Ian Lewis

Ian Lewis

Ian Lewis is one of our specialist financial writers. Ian has over 15 years of financial writing experience, having worked for some of the largest financial publications in the UK covering topics from mortgages, equity release, loans and financial claims, to name a few.

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