How To Find The Best Stocks & Shares ISA – Fintech Zoom Advisor UK
If you’re unfamiliar with them, individual savings accounts, or ISAs, can sound complicated.
It doesn’t help that they come in several different guises. But all you need to remember is that ISAs are a form of financial wrapper offering a tax-free way to save and invest.
This is a good thing to do. The less tax you’re legally obliged to pay on your savings and investments, the more money you get to keep.
Annual ISA allowance
Every adult in the UK has an ISA allowance, standing at £20,000 for the current 2021/22 tax year.
Put another way, this is the maximum amount you’re allowed to save into your ISA pot for the tax year that began on 6 April 2021.
It’s OK to spread your allowance among different types of ISA up to the £20,000 limit. But what you can’t do is carry over any unused amounts of ISA allowance to another year. Essentially, it’s a case of “use it or lose it” during the 12-month period concerned.
While many savers prefer the security of keeping their money in a so-called ‘cash ISA’ (effectively a tax-free savings account), others are happy to allocate some or all of their annual allowance to invest in the stock market via a product known as a stocks and shares ISA.
Here’s how stocks and shares ISAs work…
Before going any further, it’s essential to point out that investing in the stock market is not for everyone. Stock market-based investments come with no guarantees and it’s possible to lose money choosing this route.
You might get back less than you put in, and you could lose everything.
That said, over the long term – and by this we mean at least five years, but preferably longer – it’s possible for stock market investments to produce far superior returns to those available from, say, ultra-safe, low interest-paying deposit accounts – especially when inflation is factored in.
With inflation far outstripping the Bank of England’s base rate currently, turning to the stock market is one of the few ways investors are potentially able to produce a real return on their money over time.
What is a stocks and shares ISA?
A stocks and shares ISA is a tax-efficient account that acts as a wrapper for your investments. It allows you to gain exposure to the stock market in a variety of ways.
These include investing directly in company shares (such as those found on the FTSE 100, the UK’s main stock market index featuring its largest businesses) and in a range of managed funds.
These funds, including unit trusts and investment trusts, are pooled arrangements run by professional managers. They offer investors exposure to a variety of assets such as shares, government and corporate bonds and property.
It’s also possible to use a stocks and shares ISA to invest in more eclectic assets such as fine wines and land. But the majority of investors stick to shares and bonds.
You can only open one stocks and shares ISA each year. If you end up with several on the go at once, you can only pay into one of these during any tax year.
What are the benefits of a stocks and shares ISA?
A stocks and shares ISA shelters any returns your investments make from three key areas of tax: income tax, dividend tax and capital gains tax.
Income tax doesn’t just apply to your take-home salary. It’s a tax that’s also levied on the interest produced by certain types of investments, including bonds and some funds.
However, any interest from interest-bearing investments like these held within a stocks and shares ISA is not liable to income tax.
Share dividends are income payments made to investors based on the profits a company earns.
Not all companies pay dividends but, where they do, as an investor you’re given an allowance of £2,000 for the 2021/22 tax year before paying tax on them.
Once that limit has been exceeded, the rate is then applied at 7.5% for basic rate taxpayers, and 32.5% and 38.1% for higher and additional-rate taxpayers, respectively.
However, when investments are held in stocks and shares ISAs you avoid the need to pay tax on dividends altogether.
Capital gains tax
You’re obliged to pay Capital Gains Tax (CGT) when you make a gain from selling assets such as shares, a second property (it doesn’t apply on your main home), and other items such as jewellery.
Everyone has an annual CGT allowance which, for the 2021/22 tax year ending in April, stands at £12,300. If you hold investments such as shares outside an ISA, you’ll pay tax on any gains you make above this threshold (at a rate of 10% for basic rate taxpayers and 20% for higher and additional-rate taxpayers).
However, any gains made by investments held within a stocks and shares ISA are not subject to CGT.
Finally, another benefit of stocks and shares ISAs is that, should you need to fill in a tax return, there is no need to declare profits on it. In fact, you don’t need to mention the fact that you have any ISAs.
How do I open a stocks and shares ISA?
Stocks and shares ISAs are available directly from financial services companies including banks, financial advisers, stockbrokers and investment management firms.
An alternative way of opening a stocks and shares ISA is by using an online investment platform or fund supermarket.
In recent years, this option has become the dominant way for so-called retail investors – in other words, the likes of you and me – to do so.
How do I choose a platform?
The investment platform space is a competitive one with dozens of providers offering access to stocks and shares ISAs. Big-name firms include Hargreaves Lansdown, Interactive Investor, Vanguard, Halifax and AJ Bell.
Providers offer a range of services from basic options to more expensive premium-range choices.
Finding the best stocks and shares ISA provider for you depends on a number of factors, including your familiarity with investing, how you want to invest and the sort of service that you’re looking for.
For example, experienced investors may be happy with a basic service that just allows them to buy and sell investments and view their account online.
But, if you’re new to investing, you may be on the hunt for as much information and as many tools as possible to help with your investment decisions.
Aimed at inexperienced investors, several providers have created ready-made portfolios featuring a range of relevant investments based on your particular attitude to risk.
What does it cost?
Whether you’re an old hand or a rookie investor, it always costs money to invest, and it’s worth remembering that fees will be applied to your stocks and shares ISA regardless of how your investments perform.
Charges are levied for a variety of transactions and will depend on the make-up of your particular portfolio – in other words, the range of shares and funds you hold – and also your trading style (frequent, occasional, etc).
Almost all providers will charge investors some kind of platform or servicing fee. This might be a flat fee applied monthly. Or it might be an amount that’s calculated annually (and capped at a maximum figure) based on a percentage of the money you hold on the service.
Flat fees are preferable if you’re planning on investing a lot of money as they represent better value compared with the same charge that’s applied to a smaller sum held within your ISA. Percentage-based charges are attractive to start with, but become increasingly costly the more that gets invested.
Management fees and dealing costs
On top of platform costs, funds held within your stocks and share ISA will also incur an annual management fee from the provider offering the fund itself – an investment management firm, for example. This typically ranges between 0.1% and 1% of the relevant holding.
Platforms are also likely to apply a dealing charge every time you buy or sell a share holding or fund that’s held within your ISA. Most platforms will charge either a fixed fee per trade (which itself may alter depending on the frequency of your trades), or it will be calculated as a percentage of the investment you’re making.
If you’re planning on carrying out a lot of share trading, look for platforms that allow a certain number of free trades per month. Some trading apps – basically a version of a platform that you can run from your smartphone or tablet – offer the option of commission-free trades on stocks.
The latter make their money in other ways, such as charging currency conversion fees for trades made on companies based on overseas stock exchanges.
Transfer fees are another consideration. Most providers are happy to transfer investments into your account for free, but will charge customers where they decide to move their holdings to a rival provider.
If you prefer to execute your trades over the phone rather than online, check if there’s a charge for this before committing to a particular provider.
Bear in mind also that inactivity fees may apply where investors let their investment account lie dormant for long periods at a time. If that sounds like your potential trading style, check before signing up.
Keeping a lid on charges is an important consideration for all investors. But there are other aspects to watch out for as well, including customer service (ideally phone-based and available 24/7), ease of access to your account and consumer protection.
When it comes to the latter, check that your stocks and shares ISA provider is covered by the Financial Services Compensation Scheme (FSCS).
If your provider should go to the wall, it means that up to £85,000 of your investments will be protected. This doesn’t mean that any losses arising from poor investment decisions relating to your ISA are covered, just any that arise from the company that’s overseeing your investments going out of business.