What is a stocks and shares ISA?
A stocks and shares ISA is a tax-free investment scheme that 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.
An investment 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.
Over the years your ISA allowance can potentially save you tens of thousands of pounds in tax, turbo-charging your overall investment returns.
This 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.
The annual ISA allowance as of this writing is a hugely generous £20,000, at least until the end of the 2020/21 tax year.
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!
How do stocks & shares ISAs work?
Simply put, Stocks and Shares ISAs are a form of savings accounts that differ from the perhaps more traditional Cash ISA, as instead of – well – cash, these allow you to use your ISA allowance to buy shares in listed companies each tax year, including any profits earned from the equities!
There are two different routes into investing in a Stocks & Shares ISA: you can either pick the investments yourself, or you can choose to invest through a professional advisor (note: the latter would incur an additional annual management fee).
What makes a good Stocks and Shares ISA account?
There are three elements that I think separate the ‘ok’ Stocks and Shares ISA accounts from the ‘good’ and the ‘great’:
- Fees
- Ease of use and features
- Investments to select from
For different investors the order of importance could be different. But if you focus on finding an account with a balance of these three, it’s likely you’ve found a good account.
When it comes to fees, aim to keep them as low as possible. The main fees to consider are the ongoing platform fee, the trading fee and fund custody fees. I suggest considering these all together, since some companies will charge a higher platform fee, but no fund custody fees. While another might charge a very low platform fee, but have high trading fees. What you want to determine is the total cost you’ll face from an account.
To determine the ease of use and features on a platform you can sometimes sign up for a sample account with a broker. If that’s not possible, you can simply navigate around the broker’s main website. If the main website is difficult to navigate and unhelpful, then it’s far less likely that the accounts will be especially user friendly.
The features that tend to matter most in a Stocks and Shares ISA account are news, research and tools. There are free resources online for all three of these. For example, you can find news and research on our sister site, The Motley Fool. But for some investors, having news and research directly in their investing account is useful. Tools such as share screeners can help you narrow down the share universe to find companies you want to invest in.
Finally, it’s ideal if your Stocks and Shares ISA platform has a wide selection of investments. Even if you plan to invest simply — for example, in low-cost ETFs — a wider selection ensures that you can find the most low-cost provider.
Of course, if you’re investing in individual shares, selection is even more important. There are naturally many UK-listed companies to invest in, and most UK brokers will include those. But for those seeking a well-diversified portfolio, being able to invest in overseas shares is important.
How we picked the top-rated stocks and shares ISAs in the UK
With many Stocks and Shares ISA providers to pick from in the UK, our aim is to help you make a great choice. It’s important to remember that everyone’s situation is a bit different. So while our ratings may be a good starting point for you, it’s also important to confirm that the ISA provider fits your personal needs.
We’ve used a variety of factors to arrive at our ratings. Here are the ones that were the most important:
- Platform fee – Unlike a standard share-dealing account, it’s hard to find an investment ISA provider that doesn’t charge an ongoing account fee. It might not surprise you to hear that our preference is for lower fees.
- Trading fees – Every time you buy or sell a share in your Stocks and Shares ISA, you’ll have to pay a trade fee. Once again, lower is better, as that means more money will stay (and grow) in your account.
- Fund custody charges – In addition to a platform fee, some brokers charge a fee for holding funds in your account. Here it is possible to find accounts that don’t charge a fee, so if funds are a big part of your investing approach, it’s ideal to find an account that doesn’t charge a custody fee.
- Ease of use – We gave higher scores to platforms that were well-built and easy to navigate. This may matter less for the most experienced investors, but all else equal, an easy-to-use platform is definitely a plus.
- Research and other features – Some platforms featured research and tools to help choose investments for your Stocks and Shares ISA. We gave points to those platforms that provided these extras.
- Fees for overseas investing – When you buy shares from outside the UK, you’ll usually face extra fees from your broker. Sometimes this is just a currency-conversion fee, but sometimes there are multiple fees stacked on top of each other. As with the other fees, we favor lower fees here too.
Why you can trust us
Here at The Motley Fool, 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.
Comparing the Top-Rated Stocks and Shares ISA accounts
As we mentioned earlier, since everyone’s situation is a bit different, it’s useful to know how to compare accounts on your own. That way you can combine our ratings with your needs to narrow down to the broker that’s right for you.
Here are how to weigh some of the key factors when comparing Stocks and Shares ISA providers:
- Account fees – All things equal, lower account fees are better. But all things aren’t always equal. When comparing account fees, be sure to consider what you get in return for the fee you’re paying. Sometimes you may get a trading credit that offsets part of that fee. In other cases, opting to pay a higher monthly fee may unlock lower trading fees — which can save you money overall if you trade often. If you invest in funds, it can also be helpful to combine the account fees with fund custody fees, as this may be a better fee comparison for you from one broker to the next.
- Trading fees – While it may seem obvious that lower dealing charges are better (they are!), there can be trade-offs here too. The brokers with the lowest dealing charges may have tougher-to-navigate sites or offer less research or fewer investing tools. Consider how important those things are to you. Also consider how often you trade. If you trade often, the amount that you pay per trade will make a big difference. If you don’t trade as often, then you can more easily afford to opt for a broker with better research and tools that also charges a bit more for trades.
- Other fees – The other main fees that you’ll face are fund custody charges and extra overseas dealing charges. These you can consider in the context of your investing. If you invest in a lot of funds, then finding an investment ISA account with low or no fund custody charges is a good idea. If you don’t invest in funds, this shouldn’t matter for you. The same holds for dealing in overseas shares. Beyond these two fees, there are a smattering of other fees that brokers charge, so be sure to look closely at their fee tables before committing, to make sure they don’t charge fees that will have a big effect on your account.
- Research, tools and ease of use – This will come down to personal preference and investing experience. If you’re new to investing, it may help a lot to have an easy-to-navigate website with some research and investing pointers built in to help you get started. That can even be worth the trade-off of paying slightly higher fees. If you’re a more experienced investor, you may feel comfortable using a more stripped-down site in exchange for the lowest fees possible. Though there are plenty of experienced investors (myself included), who still appreciate a site with good usability and a decent stock screener. But if you’re looking at a fees-for-better-platform trade-off, do make sure that the bells and whistles that the broker offers are actually things that you’ll use.
Stocks and Shares ISAs: The Details
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.
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.
When can you invest in a Stocks and Shares ISA?
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 the allowance 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.
Where to invest your ISA
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.
Added services
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.
Should you switch ISA providers?
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, but switching to a new provider could make sense in some instances.
Lower fees is a prime reason to consider a switch. If fees are the reason for switching, make sure to do some quick calculations to make sure you’ll truly save with the new platform. Remember to consider all main fees together — trading fees, platform fees and custody charges. If the trading fees on the new platform are lower, but the platform fee is much higher, you may not save as much as you think.
When considering a switch also take not of whether your old platform may impose hefty exit penalties on withdrawals.
That said, switching can be a great idea. Saving on fees is one great way to win with a new provider. But additional research and tools can also be useful if you find those lacking from your current platform.
Switching can also be great for investors looking for expanded investment options. Some investors start out keeping it simple with funds or ETFs, and may choose their first account with those in mind. But over time, they may want to expand their horizons to investing in individual shares. If their old provider doesn’t have a good selection of shares, making a switch could be the right move.
When making a switch, 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.
Investment ISA or cash ISA?
The investment ISA isn’t the only option for individual savings accounts. A cash ISA is also a very popular option on the ISA menu.
There are similarities between a stocks and shares ISA and a cash ISA. Both have a nice potential tax benefit. Both are subject to the same annual isa allowance. And for both, you’ll need to find an ISA provider to hold your cash.
If you’re trying to choose between a cash ISA and a stocks and shares ISA, the biggest difference is how you put your cash to work. A cash ISA is essentially a savings account with favorable tax treatment. That means that the risk to your money is relatively low, but the potential return on your money is also relatively low.
With an investment ISA, you can invest in the stock market, meaning shares, ETFs, funds and the like, are all on the table. There is a greater potential for better investment returns (via both capital gains and dividend income), but the risk to your cash is also higher.
The choice, then, boils down to your risk appetite and the returns you’re looking for. Do you have a long investing time horizon? Can you handle it if the value of your shares investment falls? Then an investment ISA might be a good choice for your individual savings account. But if your top priority is protecting your cash, then a cash ISA may be the better bet.
The bottom line on Stocks and Shares ISAs
HMRC has presented us with a great opportunity to invest for our future whilst saving on taxes. A Stocks and Shares ISA won’t be the right choice for everyone, but this combination of share-market investing and tax benefits has the potential to really boost your long-term savings.
And thanks to online brokers, 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 load up your investment ISA with shares and funds that you believe in. Along with that, consider holding those shares and funds 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.
