We all want to make the most of the gains we earn from our investments, and a stocks and shares ISA lets you do just that. This is because when you buy and sell stocks and shares within an ISA, you don’t have to pay any UK tax on the dividends or capital gains that you get from your investments.
Make the most out of your allowance
The government sets a limit on the amount that you can invest in ISAs each year, and for the current tax year, there’s a maximum subscription allowance of £20,000. You can divide this in any way across a simple cash ISA or one through which you by shares, as well as the Lifetime ISA (maximum of £4,000) and an Innovative Finance ISA, provided you stay within the combined annual limit. You cannot carry forward any of the allowance to future years, so any unused allowance in a tax year will be lost forever.
Investing with a lump sum at the start of the tax year enables you to be fully invested as early as possible, which gives you the greatest potential for growth. But by regularly investing, you have the opportunity to spread your risk. The effect of regular investing is that you will be buying assets at different prices on a regular basis, say monthly, rather than just once. This enables you to smooth out volatile price movements — and with automatic regular investments, it can also make it easier for you to stick to your investment plan.
Choosing the right ISA provider
Choosing an ISA provider can be more complicated than it sounds. The right provider can open up a wider range of investment opportunities, whereas others may restrict your options.
And what may be the right choice for someone else may not be best for your investment needs. You should consider what you actually want to trade, how much financial advice you require and whether or not you are happy to place trades online.
It’s also important not to overlook the costs of trading. Account fees and dealing commissions can add up much more quickly than you think, and it can have a big impact on returns through the effects of compounding. Keeping this in mind, it’s also a good idea to keep your portfolio turnover as low as possible.
Picking the right investments
With a wide range of investment options available for a stocks and shares ISA, deciding what to buy can be daunting for both new and experienced investors.
You could invest directly in stocks. Or you can buy an actively managed fund, which can give you instant diversification from a single investment. You also get a professional fund manager, who makes all the key investment decisions on behalf of investors, meaning you won’t need to worry about spending time researching companies yourself. Individual investors tend to go for unit trusts or open-ended investment companies (OEICs), but investment trusts are also worth considering.
Another option would be to invest in exchange-traded funds (ETFs) that track popular stock indices, such as the FTSE 100 or the S&P 500. Investing in ETFs can be a very low cost way to access the performance of an index, with some offering ongoing charges of as low as 0.07%.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.