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First-timer's guide to stocks & shares ISAs
With low interest rates on cash ISAs right now, more and more people are looking at the other type of ISA: stocks & shares ISAs.
You can hold a variety of investments in stocks & shares ISAs, ranging from individual stocks and shares to investment trusts and managed funds.
Why choose a stocks and shares ISA?
The great thing about this type of ISA is that whatever you make is tax free. The only exception is higher- and additional-rate taxpayers have to pay 10% tax on dividends, but even that's a significant saving on ordinary rates outside an ISA.
If the idea of putting money on the stock market is likely to give you sleepless nights, then you can probably conclude stocks & shares ISAs are not your cup of tea.
Any investment you make should really be long-term and held for a minimum of five to ten years. ISAs are definitely not about timing the market. If you think you'll need the money sooner, you should stick to cash.
A stocks & shares ISA could be an alternative or supplement to a pension. For one thing, you can draw the money earlier than you can from a pension. You can also take income from it along the way.
[Compare stocks & shares ISAs]
ISA limits
The annual allowance for a stocks and shares ISA in the current 2013/14 tax year is £11,520. This will increase to £11,880 on 6th April. However, from 1st July stocks & shares ISAs and Cash ISAs are being merged into New ISAs. You will be able to hold up to £15,000 in either stocks and shares or cash or a mixture of both. You'll also be able to transfer from investments into cash and vice versa.
Where to buy a stocks & share ISA
You can buy a stocks & shares ISA from an online investment platform, stockbroker, bank/building society, a fund manager or an independent financial adviser or financial planner.
In the past, investment platforms were known as fund supermarkets, where you could only invest in investment funds. Now you can buy the full range of investments offered under the stocks and shares ISA umbrella. They are arguably the easiest way to invest if you want to go down the 'DIY' route and pick your investments yourself.
Some of the most popular platforms include Hargreaves Lansdown, Fidelity, and BestInvest.
Charges
While stocks & shares ISAs are essentially tax free, you will have to pay a variety of charges, depending on which investment option(s) you go for and where you invest.
The DIY option via an investment plaform or stockbroker is generally cheapest.
On platforms, these can range from management charges to charges for buying or selling shares to exit fees.
From April, regulation changes mean that platforms will no longer be able to accept commission payments for selling funds to customers, instead charging directly for the services they use. Investors will pay two separate fees: a fund management charge, and a platform charge. It should mean costs for fund investors should fall, which is good news. You'll see these non-commission-based funds referred to as 'clean' funds.
Previously, investors would pay 1.5% in fund management fees with no explicit platform fee – half of it would go to the fund manager, with the rest split between the platform and the distributer of the fund, making it hard for investors to tell who they were paying and how much.
The changes mean that platforms will sell funds and shares more transparently, but over the past month the changes have meant that the various platforms have realigned their pricing structures and entered what some have termed a price war. So it's well worth shopping around.
You should make sure you understand and compare these before you invest so you don’t end up paying out more than you need to.
However, it’s important to not just rely on headline rates, as the total amount that will be creamed off your investments each year will also depend on the individual fund management fees of the funds that you choose to invest in.
You should also think about what type of investments you will be buying, how frequently you might buy and/or sell, and the size of your portfolio. That is also a key factor in whether you go with a platform or a stockbroker.
Another thing to bear in mind is customer service. Do you want to be able to speak to someone on the end of a phone easily?
Or would you prefer to speak to an adviser in person, bearing in mind this will be the most expensive option?
What you can put in a stocks & shares ISA
There are various different types of investment you can put into a stocks & shares ISA:
index tracker funds – these track the performance of indices such as the FTSE 100 and FTSE AllShare, allowing you to benefit from any increases in their value, and are generally the cheapest and easiest ways to gain exposure to stock markets;
bonds and gilts – these are issued by companies and governments (the government version is gilts) in return for you, in effect, loaning them money. Gilts are generally seen as safe investments than shares;
exchange traded funds (ETFs) – these also track indices but are traded on the stock market like shares and are often cheaper than index trackers. However, because they're traded they're not suitable for dripfeeding money into;
investment trusts – these are 'companies' which pick shares and other assets to invest in to try and beat the market, and then you buy shares in the trust. They are traded on the stock market;
managed funds, where a fund manager chooses investments in an attempt to beat the market. As you're paying for the manager's time, this type of investment is generally more expensive than those listed above, especially if you go the 'DIY' route and pick what you put your money in without professional advice.
At the opposite end of the spectrum, there are also self-select ISAs, where you pick all the shares and other investments yourself.
Experts often talk about the importance of diversification, i.e. having a mixture of investments.
A couple of index trackers might be fine to start off with, but you should think about keeping some money in cash, as well as balancing your risk with some bonds. Although, ultimately, what you choose will very much depend on your attitude to risk.
