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Stocks and Shares ISA

05/11/2018

The Basics

What is a Stocks and Shares ISA?

The stocks & shares ISA is like a quarantined investment account, keeping the taxman's sticky mitts off your savings. Any increase in the value of your investments and any income you receive is basically tax-free. So it's a bit of a no-brainer if you're buying shares, funds or investments.

Every UK adult can shield up to £20,000 a year with an ISA. 

In a nutshell

• Can do much better than cash
• No strings - take your money out when you need it
• Pay no tax on profits you make
• Get going online from just £1 a month

Is It Right For Me?

Good if you ...

  • Have a timeframe of 5 years+
  • Are fed up with low interest rates
  • Don't want to lock money into pensions

Not Good if you ...

  • You need access to the money soon
  • Have credit card debt to pay off
  • Will faint if markets have a bad year

People like you ...

Females in their 60's

The Numbers

The Benefits

  • Usually the best account to start investing into
  • Shield up to £20,000 a year from the tax man
  • The FTSE 100 in 2017 rose by about 12%. Interest rates are a limp 0.75%
  • But returns can be volatile and not guaranteed
  • Good vehicles for long-term savings
  • Easy access when you need it
  • Digital developments mean novices can play too
  • Get a pre-packaged bundle of diverse global investments

The Detail


Investing for beginners

Investing for beginners

In this 10-minute audio guide, Holly and Georgie discuss the ins and outs of getting started on the investment journey.


Choosing an ISA can be like choosing a playlist

You don't need to be a stock market genius - even stuffy old finance is not immune to the digital revolution! This video explains how you can get an online ready-made option quickly and cheaply.


Cash vs Stocks and Shares

The latest figures from the Government show that we collectively put £80 billion into ISAs in the last tax year. Around three quarters of these contributions were into cash ISAs. So which one is right for you?

The two biggest factors in this decision are:

  1. How soon will you need to get your hands on this money?
  2. Does the stock market make you worry to the extent you wouldn’t sleep at night if your savings were bouncing up and down on the bumpy ride that is the stock market?

Here’s a rule of thumb. If your timeframe is five years or less then it’s likely that a cash ISA will be better for you. Here’s why. The stock market jumps up and down. You’ve all seen those bumpy graphs on the news.

But let’s think about this as if it were the housing market. Imagine you hear on the news that the property market is down 3% in your area. Do you freak out and run for the hills and stockpile baked beans? No – only if you are planning to sell that year. If you’re planning to buy a house, it’s good news. Shares are the same. Unless you need to sell at that point in time, you can ride out the bad times.

You lose money if you have to sell when things are on a downwards turn. If you can stick ear plugs in and wait for things to bounce up again, you will be fine.

So this is why time matters. If you need to get your cash next year, you’ve stuck your money in the stock market for 12 months and Trump does something daft and markets are miserable – well, you’re stuffed and your back’s against the wall. But if you can park your money for 5 years or more, it’s much less likely you will have to sell when things are rubbish.

A well-respected survey, the Barclays Equity and Gilt Survey in 2014 found that, over 10 years, stocks and shares were 90% more likely to do better than cash.

How Risky is it?

First up, don’t lose your mind and chase daft things like Bitcoin, which is like gambling and spivvy schemes (timber/shipping/vineyards etc.). Investing is basically backing decent companies which do things you can explain and which make a profit, or have a damn good plan which will make them profit. It’s like Dragon’s Den on a larger scale.

Some companies won’t make it. They’ll not hit oil/get that patent/suffer at the hands of an inept CEO. So the most important rule is to diversify and spread your money around a large pool of investments, minimising exposure to any one bad apple. An investment fund is the best way to do this.

No-one can look you in the eye and guarantee that you will make money in the stock market. However, if you are looking at more than a 5-year timeframe, the odds do favour the stock market to do better than cash.

Cash ISAs will protect your lump sum, but your money is likely to grow at a much slower pace, leaving you exposed to the risk of inflation. The Barclays Equity Gilt Study of March 2014 said that “Over the last 10 years, cash has delivered the worst returns since the 1970s”.

The cost of living is also going up faster than interest rates. So money in a bank account is effectively going backwards – its purchasing clout gets lower every year. So it’s safe, yes, but not a great way to save for your future or to make your money work hard.

Finally let’s put numbers on this – all rear-view mirror stuff but it gives you an idea. What’s the worst case scenario? In 2008 when the global financial crisis hit, the FTSE 100 fell dramatically. £100 would have turned into about £70. By the end of the following year it would have been back up to just under £100.

How do I start?

If you have not invested before, don’t feel that you are on the outskirts of a club which you’re not allowed to join. It is simpler than ever before.

Online services will offer you pre-packaged basket of investments. So you can find the investment equivalent of the ‘mixed case’ of wine, or the supermarket ready-meal.

We’d suggest testing the waters with one of the online quizzes which guide people into a suitable basket of investments. You can find these at most of the new robo advisers . The rule is not to stick everything into one or two shares, not to chase fads like bitcoin and to chip in as much as you can as often as you can.

Once you have a sense about what sort of ‘risk profile’ you might be – basically this is how much up and down you can put up with – you then see what the blend should be between lower risk stuff such as cash or ‘investment bonds’ and higher risk stuff such as shares.

If you don’t want to go with one of the lesser known new digital brands, big giants such as Aviva and Standard Life have ready-made DIY investor options, with Santander’s new Digital Investor coming soon. Alternatively US giant Vanguard offers 5 ‘multi-asset’ funds called LifeStrategy funds which are probably the lowest cost mainstream way of getting started these days.


ISA MOT: 10 commandments for investors

ISA MOT: 10 commandments for investors

So you have an ISA. You have invested. You know the deal with funds vs shares. And you know that the Daily Mail shrieking "market meltdown" could actually be a smart time to buy in.

Nonetheless it’s always a good idea to set aside 15 minutes to give your ISAs the once-over. So here are a few pointers to chew over.

Things to keep track of

  • Have you got a 'home bias'?
  • Have you got too many funds?
  • Are you paying too much?
  • Are you using ISA allowances?

Our needs are always changing

Perhaps you have inherited some money. Changed jobs and have a different income? Changed tax brackets? Or maybe there are some dependants on the scene?

Commandment 1: Review your position on ‘safe’ versus punchy

How are you feeling about the world? Chances are, you may not feel like taking a risk on Bitcoin when you’re a few months into new parenthood, or if your company is going through a rough patch. You may just feel like you’re getting on a bit and wealth preservation is more important than capital growth. Your personal circumstances will influence your investments, including the amount you hold in riskier assets, such as the stockmarket.

The only time we really lose money in the stock markets is when we are forced to sell. Have you got three months’ income in easy access cash? And would you be OK if stock markets took a tumble? If so, time to add a bit of risk to your portfolio and aim for higher returns.

Commandment 2: Income versus growth

Growth may be appropriate when you are young and thrusting (oooof), but if you want to take a step back in your career, work part-time or change jobs, it might be time to shift your portfolio to create an income stream. This is easily done but may necessitate a greater focus on areas such as global and UK equity income, or higher-yielding bonds. Some top UK equity income funds pay about 3% - 4% income a year – look at the fund shortlists on leading platforms such as Hargreaves Lansdown or check out Trustnet Direct for ideas.

Commandment 3: Do you have the time?

This one needs you to be really honest. Do you have the time to look after your portfolio? Do you follow markets? Do you rebalance every year to keep a well-diversified portfolio? If so, great! If not, these days you can buy a passive multi-asset fund as a very low-cost (about 0.2%) and this will give you access to a diversified portfolio of global assets which a nerd continually tweaks on your behalf. I tend to put half of my savings into one of these. It’s the more sensible but boring bit of my portfolio. Saves me from myself!

Commandment 4: Diversification

Take another honest look. How much of your portfolio is in the UK? Probably more than you would have if you lived in Germany or the US. This is known as home bias. It’s OK if this is on purpose and you are very bullish on Britannia. If not, and it’s just because you know the brand names, then this is ‘home bias’. It’s why I had 40% in Australian equities in my early portfolio when I lived there as a young pup. Bonkers. There are lots of great global funds which give you access to brands and markets from across the world.

Have your funds changed?

Commandment 5: Spot your dogs

Is your fund rubbish? Whether it was great and is now rubbish or has always been rubbish and you just don’t want to admit you made a mistake, you should check. In this respect, Tilney Bestinvest’s ‘spot the dog’ guide – which identified serial underperforming funds that probably should be avoided or jettisoned – can be helpful.

Judging when to sell is tricky. Selling because the numbers look bad over a year is quite often silly. You’re guaranteed to spend money on transaction fees, making the platforms richer and ensuring that you’re always playing catch-up.

But if it’s a turkey and the majority analyst opinion is that it’s a turkey then it might be time to sell. I suggest looking at about three well-known research houses or investment platforms to see if there is a consensus view from the number crunchers. Try Charles Stanley Direct, Hargreaves Lansdown, Interactive Investor, The Share Centre and Morningstar as a few options.

Commandment 6: Is your fund earning its crust?

Another thing worth checking is that if you are paying active fees that you’re genuinely getting active performance. Looking for funds with a high ‘active share’ – it should be on their factsheet:

active share example

This means they aren’t charging you a big fee for brain power and then playing chicken, hedging their bets and just doing what everyone else is doing. We like Nick Train at Lindsell Train for making calls and putting his money where his mouth is. Terry Smith at Fundsmith is another who holds very few stocks in his funds – usually less than 30. Both of these are available through Hargreaves Lansdown.

Arguably the active share % could be called the Cojones-O-Meter. (was that cheap!?)

Commandment 7: Are your funds getting larger?

It is a sad fact of life that the investment industry tends to incentivise fund managers to grow larger and larger funds, but it can lead to a drop-off in performance. It even has a name - ‘asset bloat’ – truly, the gluten of investment funds. If your fund is pushing £1bn, see if there might be a better alternative. There may not be and there are plenty of good funds of this size, but it’s worth a review nevertheless.

General Maintenance

Commandment 8: A question of balance

It's easy to fall in love with those investments that have done well for you. If you’ve made a load of cash in Bitcoin, it’s easy to think that will go on forever. It probably won’t, so it worth rebalancing your portfolios every now and then to stop you having too much in a handful of holdings that have done well in the past. It is worth aiming to hold a balance of sectors, geographic regions and market capitalisations.

My uncle holds an Alaskan mining company and tells me that it is up and down with the news which veers from dismal to glee. This barmy share has more than doubled in value. I tell him he should sell half, take his original investment off the table, and then the rest of this gambling exercise is just potential upside. He doesn’t listen but at least I have bossed him into having more than 90% of his money in sensible stuff!

Commandment 9: Watch your tax wrappers

It is easy to end up with odd investments all over the place. The investment trust saving scheme here, the platform experiment there, a bit in robo and so on. This can mean you are not using your ISA and pension allowances, but have ‘unwrapped’ income, on which you are paying tax. It’s worth sorting this out by transferring investments into a tax structure.

Read up on what is crazily called Bed and ISA or Bed and SIPP. I kid you not. You can ask some platforms to transfer shares or funds into an ISA so it becomes that year’s ISA contribution. It quarantines these investments from future tax. Also good if you have the spare money and can transfer investments into the tax beneficial pension environment.

Commandment 10: Check for overlaps

ISA portfolios are often made of up of a whole host of funds and trusts, many of which may invest in the same stocks. This means you can end up with large weightings in one or two stocks or sectors. This isn’t a great idea from a portfolio diversification point of view even if you really love those companies. Most of the trading platforms allow you to ‘look through’ your portfolio to the weightings in the US, Europe and so on. It will also tell you how much you have in any one company or sector. Hargreaves Lansdown, for example, has a ‘portfolio analysis’ tab and ‘x-ray’ analysis.

Bonus Commandment: You hold how many funds?

(OK, I’m sorry, this is point number 11 but I didn’t want to let the truth ruin a headline.)

I have spoken to people who get so anxious about picking ‘the wrong horse’ that they have more than 50 funds. Completely mad and a good way to unravel any good work that a fund manager might do.

As a rule of thumb I think 8 – 16 is sensible depending on the size of your portfolios. If you’re holding much more than that, you’re probably over-diversified and won’t be getting the benefit from the active managers you hold. If this is the case, consider trimming back to a more focused portfolio. Remember the tax implications of selling outside of an ISA or SIPP.

Go forth

PHEW! At this point you’re probably ready for a glass of vino and some bad telly. Well done. Job done for another 6 months! As a final note, I do love this quote from George Soros:

“Good investing should be boring.”

His point was that if you enjoy it, you’re probably not very good at it. i.e resist the urge to endlessly tinker for the sake of it!

Research investment providers here

 

 

The 10 (+1) Commandments

  • 3 months' income in cash?
  • Do you need income?
  • Do you have the time for this!?
  • Is there a home bias?
  • Do you have some rubbish!?
  • Is active actually active?
  • Are your funds too fat?
  • Are you spread around?
  • 'Bed and ISA' !?
  • Overweight one area?
  • More than 8-16 funds.....?

FAQs

A question of tax

Stocks and shares are tax-efficient accounts for investing in stocks and shares. They aren’t totally tax-free – there are a few tiny fiddly bits – but they’re not far off.

- You don’t pay capital gains tax on profits from increases in share prices when shares are sold. Good. Outside an ISA you’d pay 10% (basic rate taxpayer) or 20% (higher rate taxpayer) once you go over your capital gains tax allowance for the year.

- There is no tax on interest earned on bonds. Nice. This would be treated like cash interest outside of an ISA.

 - There is no tax on dividends within an ISA. Outside an ISA there is a dividend allowance of £5,000, but this will drop to £2,000 in 2018. Beyond that, dividends are taxed at 7.5% (basic rate taxpayer) and 32.5% (higher rate taxpayer).

For most of us, these are the most sensible way to save and invest in the stock market.

What do you recommend?

Post Office
and Virgin Money are best if you are happy to lock your cash away for one year. They are paying 1.45% and 1.41% respectively but do check the terms and conditions. No such thing as a free lunch and all that.

Hinckley & Rugby offers the best variable flexible cash ISA currently paying 1.20% (as of January 2018) but you have to give 120-days notice for withdrawal of your cash or you lose the interest.

 

How are stocks and shares different from a cash ISA, is it worth having both?

Cash ISAs are simply savings accounts where you don’t pay tax on the interest your cash makes. But are they still as interesting as they were a few years ago?

As an Osborne legacy, basic rate taxpayers now get the first £1,000 of interest in any standard savings account tax-free. £500 if you’re a higher rate taxpayer. With interest rates as low as they are, that means you could have about £80,000 in savings account and not pay tax. So why on earth would you bother with a cash ISA?

Here’s the thing. Cash ISAs are for life, not just for Christmas. You keep on chipping in and the balance (hopefully) grows. And that balance is kept in a tax-free environment. If interest rates change or your stash gets pretty big or if you move up the pay scale and become a higher rate taxpayer, you will never have to pay tax. So it’s one less thing to worry about.

Can I switch provider once I am set up?

Yes. Things change and – especially with a cash ISA rates change.

However, do take care. If you withdraw the money, it’s game over. You won’t be able to put it back in. Instead you have to get the ISA guys to transfer the funds over or it’s seen as a withdrawal, and you can’t stick it back in the tax-free pot.

The good news is usually that your new chosen ISA will be salivating at the chops to get your business and so they will usually manage the transfer process and follow-up for you, once they’ve received your initial instructions.

Where Can I Get One?

Our independent team has scoured the markets, set up test accounts and really put these companies through their paces. Our Best Buy pages detail who we rate for ISAs. And who customers rate.

True Potential scores well with users and has a nice online journey. AJ Bell Youinvest is more popular with savvy investors. And Wealthify is a nice new option which lets you start from just £1. If you believe that you get what you pay for and are happy to pay a little more for great service, it's hard to look past Hargreaves Lansdown

 

 

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