5 top tips for making the most of your Stocks and Shares ISA allowance

Are you looking for ways to use your ISA allowance for this tax year? Take a look at my top 5 tips for investing in a Stocks and Shares ISA.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The letters ISA (Individual Savings Account) on dice on stacks of gold coins on a white background.

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Stocks and Shares ISAs are an excellent way of making a tax-efficient investment, particularly for investors looking to build an equity-based portfolio over the long term.

With less than three months left to use this year’s ISA allowance, take a look at my top 5 tips for investing in your Stocks and Shares ISA.

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1. Why should you use your ISA allowance?

The annual allowance for a Stocks and Shares ISA is £20,000 for the current tax year (ending on 5 April 2022). Unlike pension contributions, you have to “use or lose” ISA allowances as you can’t carry forward unused allowances from previous tax years. No income or capital gains tax is payable on ISAs, making them particularly attractive to higher-rate taxpayers.

Please note that tax treatment depends on the individual circumstances of each individual and may be subject to future change. The content of this article is provided for information purposes only. It is not intended to be, neither does is constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

2. How to diversify your portfolio

There is a wide range of investment options for Stocks and Shares ISAs, including funds, investment trusts, shares and bonds. Funds allow investors to diversify their ISAs by providing access to a ready-made portfolio picked by fund managers, with a broad choice of sectors including:

  • geographical regions (e.g. the U.K., Asia Pacific and North America)
  • specialist sectors (e.g. healthcare and information technology)
  • asset classes (e.g. government and corporate bonds, shares and property)

According to Trustnet, these were the top 5 sectors by returns for 2021 and 2020:

2021

2020

IA India/Indian Subcontinent (28.3%)

IA Technology & Telecommunications (44.4%)

IA North America (25.5%)

IA China/Greater China (33.5%)

IA Commodity/Natural Resources (24.0%)

IA Asia Pacific Including Japan (27.2%)

IA UK Smaller Companies (22.9%)

IA North American Smaller Companies (23.6%)

IA Property Other (22.5%)

IA Asia Pacific Excluding Japan (20.0%)

 

The IA Property sector achieved the fifth highest return in 2021 yet was the third lowest sector by returns in 2020, posting a loss of 7.3%. This illustrates the need to diversify your portfolio, along with avoiding the temptation to invest in “last year’s winners”, given that none of the top 5 sectors in 2020 made the top 5 in 2021. Global funds may be a good option, providing fund managers with the freedom to invest across different geographical regions and sectors.

3. Should you choose active or passive funds?

Active funds aim to out-perform the stock market by stock-picking and typically charge a higher fee, whereas passive funds are a lower-cost option as they aim to track an index. According to the Investment Company Institute, the average expense ratio was 0.71% for active and 0.06% for passive equity funds in 2020.

Are active funds worth their higher annual fee? According to Trustnet, this is sometimes, but not always, the case; by way of example, active funds in the IA UK Smaller Companies sector achieved an average return of 22.7% in 2021, compared to a return of 13.9% for passive funds. However, the average passive return was 32.8% in the IA Financials sector compared to 11.9% for active funds in 2021.

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4. How to pick the best funds

Having decided the sectors you wish to invest in, it’s worth using sites such as Morningstar and Trustnet to compare a fund’s performance against its peer group. A good rule of thumb is to identify funds that have consistently achieved top-quartile performance within their sector over a 3- to 5-year time period.

Examples of funds achieving top-quartile returns over a 5-year period include Baillie Gifford Positive Change (Global, 240.3%), MI Chelverton UK Equity Growth (UK All Companies, 147.9%) and UBS US Growth (North America, 154.5%).

5. How to pick the best ISA provider

In addition to customer service, considerations for picking your ISA provider should include:

  • Platform fees

Many of the large platforms charge an annual fee based on the total value of your portfolio. For investors with a portfolio of £150,000, Hargreaves Lansdown would charge an annual fee of 0.45% compared to 0.35% for Charles Stanley Direct; this could amount to a difference of £1,500 over a 10-year period. However, some providers charge a fee for buying and selling funds that can add up for investors with a high volume of transactions.

Other platforms charge a fixed fee that may provide better value for investors with larger portfolios. Interactive Investor’s basic plan costs £9.99 a month with one free trade, then additional fees of £7.99 per fund purchase or sale.

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  • Choice of investments

If you prefer to choose from a wide range of funds, pick your ISA platform wisely. Platforms such as Hargreaves Lansdown and Fidelity offer investors a choice of over 3,000 funds, whereas Vanguard offers a more limited range of 70 of its own funds.

Transferring between ISA providers is a relatively straightforward process, although it can take 6 weeks, depending on whether transfers are made via stock transfers or cash.

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