Updated: 26th July, 2019.
Tax free is better! Historically, investing in shares has led to higher long-term returns for investors. The opportunity with shares can be even better when paired with the tax advantages of a stocks and shares ISA. Here, we’ve gathered together what we view as the top providers for stocks and shares ISA accounts.
Here are MyWalletHero’s picks for the best stocks and shares ISAs.
A stocks and shares ISA can be a terrific way of investing for your future because it gives you hugely generous tax advantages that you’d be hard pressed to find anywhere else.
This tax-free investment scheme allows you to invest in a range of stock market investments, including individual company shares, investment trusts, unit trusts and exchange traded funds (ETFs), and take all your returns free of income tax and capital gains tax.
You do not even need to declare your ISA investments on your self-assessment tax return, if you complete one.
HM Revenue & Customs (HMRC) isn’t often this generous, so my personal view is that you should strongly consider taking maximum advantage of this opportunity!
Over the years your ISA allowance can potentially save you tens of thousands of pounds in tax, turbo-charging your overall investment returns. The UK now boasts a growing band of ISA millionaires, dedicated private investors who have maxed out their allowance year after year and seen their investments grow into big money.
That is money that, while inside the ISA wrapper, the taxman cannot touch, for as long as you live. You may even pass your ISA pot free of tax to your spouse or civil partner when you die, although after that it becomes subject to inheritance tax.
Even if you don’t make a cool million, you still have the possibility to build an invaluable pot of money, free of tax for life.
The Government originally launched ISAs back in 1999, but they are not an investment vehicle in and of themselves. Instead, they are a tax-free wrapper into which you can pop a vast range of investments to shield them from HMRC, which you can then actively manage yourself or leave to be ‘passively’ managed for you.
The annual ISA allowance as of this writing is a hugely generous £20,000, at least until the end of the 2019/20 tax year.
Stocks and shares ISAs are highly flexible. You can trade or pre-order stocks and funds online at any time of day or night, whenever you wish. You can invest either single lump sums from as little as £250 or £500 or regular monthly sums starting from around £25 or £50, depending on the online share-dealing site.
You can withdraw money out of your ISA at any time, but there is a catch. You cannot use it as a bank account – continually taking money out and paying it back in – since the repayments will count towards your annual allowance.
Most people will not be able to save enough money to use their full £20,000 allowance, but there’s no need to worry about that. The tax savings is available whether you use the full allowance or a smaller amount. So if you want to use an ISA without maxing it out, you can simply invest as much as you can afford. Saving something is always better than nothing!
It’s also possible to open a Junior ISA for younger family members, and put aside another £4,260 on their behalf this year.
The ISA allowance is yours on a “use it or lose it” basis. It expires at midnight on 5 April each year, and if you haven’t used it by then you have lost it for good. However, don’t despair if you miss the deadline as your new allowance kicks in the very next day, on 6 April.
The annual deadline used to trigger a last-minute rush of people trying to use up their quota, known as the ISA season. Now that the allowance is so generous, the sense of urgency has abated as people feel less time pressure because they can always use next year’s allowance instead.
Waiting could be a mistake, though. The danger is that you never get down to investing. We all have our long to-do lists, and saving for your retirement is one that you don’t want to let fall to the bottom of that list. The sooner you start the better, as that way your money has much longer to grow.
You can also put some or even all of your £20,000 ISA allowance into a cash ISA, which is lower risk than the stock market but your long-term returns are likely to be much poorer over the long run.
One of the best ways to invest your stocks and shares ISA allowance is by signing up to an online DIY investment platform, also known as a fund supermarket.
A fund supermarket allows you to buy and sell stocks on an “execution-only” basis, which is almost always cheaper because you do all the legwork yourself rather than paying a financial adviser to do it on your behalf.
The best platforms give you a massive choice of thousands of both stocks and funds, which you can buy and sell at minimal cost in seconds. It is a far cry from the days when you had to pick up the phone to get tips from your personal stockbroker or independent financial adviser and ask them to place some trades on your behalf.
There are now dozens of online investment platforms to choose from, with new ones appearing all the time. This is good news for investors, because tough competition is driving down charges, which means you get to keep more of your returns for yourself, rather than handing them over to your platform manager.
Every service differs slightly, and may suit some investors but not others. This means you should not simply choose the platform offered by your bank, but shop around to get the best possible deal.
If you already have a platform it may be worth checking the competition, to see if there is now something better for you there.
Your choice of platform will also depend on what kind of investor you are. Factors such as how often you trade, what type of investments you buy and the amount of independent expert advice and analysis you need will all guide your choice.
There is almost no limit as to how many different investments you can hold inside your ISA. So before signing up for a platform, decide what investments you actually want to buy and check whether your platform offers them.
While the most comprehensive platforms offer thousands of stocks on dozens of global exchanges, plus thousands of investment funds, some offer only a focused group of carefully selected funds. Some platforms only offer investment funds, and don’t offer stockbroking services at all, so avoid these if you plan to trade direct equities.
It all comes down to what you want. Do you have the knowledge and confidence to invest in individual company stocks, and are willing to accept the potential volatility? If so, then make sure your chosen site has all the stockbroking facilities you need.
Growing numbers of investors now make a beeline for passive index tracking funds such as exchange traded funds (ETFs). You can buy and sell ETFs like stocks and shares, and they have minimal charges and this makes them a great low-cost way to track global indices or commodities.
Or would you prefer to spread your risk by investing in actively managed unit trusts or investment trusts? These are sometimes known as “collective investments”, because they pull money from thousands of investors and spread it among dozens of different companies to reduce the damage when one performs badly or even goes bust.
Many platforms offer a range of investment fund recommendations and even model portfolios, to help guide your investment choice. These can be particularly useful for newbie investors.
The next step is to work out what this is likely to cost you every year.
Working out which platform offers the best value for your trading patterns is the toughest part because they all have a complicated array of fees.
Stock pickers will want to look out for share dealing charges, which can range from as little as £1.75 to around £12. Don’t necessarily go for the cheapest, though, which is best depends how often you trade.
If you slam through a dozen or more trades every month, then look for a site that offers reduced fees for active or regular traders. Check the small print carefully, you might have to carry out a minimum number of trades to qualify for that low rate.
If you are more of a long-term buy and hold investor, buying stocks or funds when you have cash to spare then holding onto them for the long-term, the size of the dealing fee is less important. In that case, you could accept higher dealing charges in return for lower quarterly or annual standing charges, or flat-rate annual service fee.
Some sites give you the option to pay a percentage of your share trade, say, 1%. If you usually trade relatively small sums, such as £500, that could reduce the fee to just £5. However, if you invest, say, £5,000, that fee leaps to £50. This is also a problem if you leave money to grow for the long term, if it’s worth, say, £25,000, your 1% dealing fee will be £250. Ouch.
Remember, every penny you pay in fees is one less penny to grow in your portfolio over the long term.
Platforms also have different charging structures for investors who want to pay in regular monthly sums. A typical charge might be £1.50 a month, but always check. You also have to pay fees if you want to invest a regular sum every month. If that is your preference, again, look for the site that offers the lowest fees. Similarly, you will pay a small fee for automatically reinvesting dividends, which might be 1% of the money, with a minimum charge of £1 and maximum of £10.
There are usually no set-up fees for new customers, but a handful of platforms do so watch out.
Finally, some sites have a different charging structure for investments outside of an ISA. Charging structures can change, so it could be worth periodically checking to make sure you are still getting the best deal.
If you prefer to buy collective investment funds such as unit trusts and investment trusts, you will find these typically have a different charging structure. You will pay two sets of charges, the platform’s own charges plus those on the underlying funds.
Platform charges are often a percentage of the money you hold in funds, which may fall as your wealth grows. For example, you may pay 0.5% on the first £250,000, falling to 0.25% on funds between £250,000 and £1m, 0.1% on money above that and nothing at all on funds over £2m.
For the underlying unit trust funds, most platforms now reduce the manager’s initial charge to zero, which is a great saving, and may also offer you a small percentage rebate on the manager’s annual management fee as well.
You typically do not have to pay any dealing fees when buying funds, but again, check, because it’s not always the case.
Some of the bigger platforms offer copious amounts of research on their site at no extra cost. The best include extensive research on individual funds, including daily market reports, company financial reports and updates, buy and sell recommendations, and other useful information.
If you want to trade international shares, check whether this is an option and that your preferred market is covered. They typically come with a slightly higher dealing fee of around £15.
And if you want to trade more esoteric investments, such as contracts for difference and foreign exchange, again, check whether your site offers this.
Most platforms want their customers to trade online but some do offer telephone-based services as well, although you may have to pay slightly higher dealing fees. Also decide whether you want regular support from a call centre, or email and live online chat support.
If you want to check your portfolio on the go using a mobile phone app, check what’s available.
Some platforms will let you open a demo account allowing you to trade shares without putting real money at risk. They may also offer watch lists so you can keep track of companies that interest you and look for buying opportunities.
Other extras will include stop losses and buying orders, which will trigger a trade once a share hits a certain price. Use these carefully, because they can work against you.
You can only pay new money into one ISA wrapper in any given financial year, although you can keep wrappers open from previous years. For simplicity, you may prefer to transfer all your holdings onto the same platform, especially if one has more competitive fees but watch out, your old platform may impose hefty exit penalties on withdrawals.
Contact your new platform to see if it can offer you any deal to cut the cost of ISA transfers. It may also give you the choice of transferring your funds as they are or selling them and reinvesting the cash.
The ability to buy and sell shares in just a few clicks has liberated private investors and opened from them up to a world of opportunity. However, you should handle this freedom carefully. Resist the temptation to over trade – constantly buying and selling shares on the latest market news – as this will rack up dealing charges that will eat into your overall returns.
So do your initial research carefully and aim to buy stocks that you believe in, and consider holding them for the longer run. It typically doesn’t work out well when you chop and change every time a stock dips or if there is a wider market correction.
And of course, remember to check any orders carefully before you click “buy” or “sell”. A slip of the finger can cost you dear, and if you are a DIY investor there is no one to blame but yourself.
Getting started with a stocks and shares ISA and choosing the right broker may seem complicated, but you should soon get the hang of it. And when you do, you are ready to start trading stocks and working towards that million!
Here at MyWalletHero, we provide expert reviews that highlight the things that actually matter when making decisions that affect your personal finances. We’ve published thousands of articles on sites well-known sites around the world, and sometimes we even get talked into putting on a tie to appear on TV networks. But don’t worry: You’ll find that our reviews are all jargon-free and written in plain English. As investors who manage our own portfolios through online brokerage firms, we have personal experience with many of the most popular online brokers which informs our view on brokers, how they compare, and pitfalls to look out for, to help you decide what might be best for you.
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