What is a stocks and shares ISA?
A stocks and shares ISA (individual savings account) is a tax-free investment account that allows you to invest your savings up to a certain allowance each year. This can include individual shares, investments funds, bonds, and a whole host of other options (depending on the platform you use).
Using 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.
Any money held inside the wrapper is shielded from tax on things like dividend and capital gains tax. This can help turbo-charge your overall investment returns throughout your lifetime.
How do stocks & shares ISAs work?
Simply put, a stocks and shares ISA is a type of savings account that you can use to invest and potentially earn a return. You can use your ISA allowance to buy shares in listed companies each tax year, resulting in potential profits earned from the equities.
Any UK tax resident over 18 can hold an account. You have plenty of options to choose from when it comes to deciding where to hold your ISA and different platforms will suit different types of investors.
Whether you want complete control over your investments and lots of choice, or if you would prefer fewer options and an easy-to-use interface, there is a stocks and shares ISA for you.
What makes a good Stocks and Shares ISA account?
There are four elements that separate the mediocre stocks and shares ISA accounts from the best ones:
- Low fees
- Easy to use
- Helpful account features
- Wide selection of investments
For different investors the order of importance of each element could be different. But if you focus on finding a platform with a combination of these elements, you’ve likely found yourself a fantastic account.
Let’s take a look at each factor:
1. Low fees
When it comes to fees, aim to keep them as low as possible. The main fees to consider are the ongoing platform fees, trading fees, and fund custody fees. Understanding the total costs is important because this will have an impact on your long-term returns. So make sure you understand all the charges when looking into a platform.
2. Easy to use
To determine the ease of use of 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 likely the accounts may not be especially user friendly either.
3. Helpful account features
The features that tend to matter most in stocks and shares ISA accounts are: news, research, and tools. There are free resources online for all three of these, but for some investors, having news and research directly in their investing account is useful. These tools can also help you narrow down the options, when looking for investments you want to invest in.
4. Wide selection of investments
Finally, it’s ideal if your stocks and shares ISA platform has a wide selection of investments. Even if you plan to invest in simple funds, your strategy could evolve as you learn more about investing. For those of you looking for individual shares across different markets, it’s vital to have a large choice of options available to create a well-diversified investment portfolio.
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 lose the allowance for good. However, if you miss the deadline, your new allowance kicks in the very next day, on 6 April.
Waiting could be a mistake, though. We all have our long to-do lists, but you don’t want to let saving for retirement fall to the bottom of that list. The sooner you start the better, as that way your money has much longer to grow.
How much can you invest in an ISA?
Currently, you can invest up to £20,000 into your stocks and shares ISA account during the 2021/2022 tax year. This has been the limit for a number of years, but it could change and be made either higher or lower in the future.
Therefore, it’s well worth trying to make the most of your ISA allowance each tax year because they may not be there forever. And any unused allowance does not get carried over into the following year.
Fees on stocks and shares ISAs
Here’s a quick breakdown of the different types of fees you may encounter when you’re searching for the best stocks and shares ISA accounts:
- Platform fee – It’s hard to find a stocks and shares ISA provider that doesn’t charge an ongoing account fee. This could be a flat monthly amount or an annual fee that is charged as a percentage of your holdings. So how much you have in your account could determine which option works out cheaper for you.
- Trading fees – Every time you buy or sell an investment in your stocks and shares ISA, you may have to pay a trading fee or commission charge. The lower the 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 investment funds in your account. It is possible to find accounts that don’t charge a fee, so if investment funds are a big part of your strategy, the best stocks and shares ISA might be an account that doesn’t charge you a custody fee.
- International dealing charge – If you do use an account that lets you buy overseas shares, platforms may charge a foreign exchange (FX) conversion rate to buy international investments. This is often a fairly low percentage of the transaction, but it can make a big difference if you plan on buying lots of overseas investments.
What is the best performing stocks and shares ISA?
The stocks and shares ISA is just a type of account. So, judging how well a stocks and shares ISA account performs will be based purely on the investments held within the account.
You can give yourself the best chance of seeing strong performance by looking for an account with low fees and lots of choice. Because if you put two ISA accounts head-to-head and chose the exact same investments, the account with the lowest fees would be the one that ends up performing the best.
A great account will increase the likelihood you’ll be successful, but ultimately, the best performing stocks and shares ISAs will depend on the quality of investments you put into your account.
Which type of stocks and shares platform should you choose?
One of the first decisions you’ll make before opening your account is whether you want to pick all your investments yourself (DIY) or if you’d like some ready-made portfolio options. Each has their own benefits and drawbacks:
If you go down this route, you will shoulder all the responsibility for choosing your investments and managing the portfolio. This can be great fun, and means you have total control, but it also means you have to make all the decisions. Having to do this might not be enjoyable for everyone because of the added pressure of researching and monitoring all investments. But for those who have the time and are interested in the world of investing, this can be a cheaper way to invest.
This is where you can basically hand over control of your investment selections. Doing this can lead to higher fees but it does mean that the platform uses experts or an algorithm to choose your investments. The ready-made option is good for beginners and those who don’t want to spend time building and maintaining an investment portfolio.
Some platforms will give the choice to use either option in your stocks and shares ISA account. This can be good for those who may want to start out with a ready-made portfolio and then progress to a DIY style once you feel more comfortable.
You can always try out different methods. So don’t feel like choosing ready-made or DIY is setting your strategy in stone, because you can always adjust your approach or move accounts if you want to.
How to open a stocks and shares ISA
The process of opening a stocks and shares ISA will vary depending on what platform you choose.
Most providers will allow you to open an account on their website or through a dedicated app on your phone. However, some will also let you call up and open your account over the phone. And if you were to open an account with a bank, they sometimes let you arrange an account in-branch.
Opening a stocks and shares ISA account is often a very smooth process and other than some basic personal information, your National Insurance (NI) number is usually the only additional thing to provide.
If you find the process difficult or frustrating, it may be worth considering a different provider. Because an unnecessary complex account opening procedure could be a signal that the platform won’t be easy to use.
Are stocks and shares ISAs covered by the Financial Services Compensation Scheme (FSCS)?
If your stocks and shares ISA provider is regulated by the Financial Conduct Authority (FCA), it should be protected by the Financial Services Compensation Scheme (FSCS). That means that if your ISA provider goes bust, your money and assets are protected up to £85,000 per eligible person, per firm.
It’s important to note that this only applies to a firm failing. Any value your investments lose due to fluctuations in the stock market are not protected.
How to pick the best stocks and shares ISA for you
There’s no single best stocks and shares ISA account — it’s all about what’s best for you. There will be loads of different factors that will determine which account best suits you as an individual.
1. Outline your investing strategy and financial goals
Take some time to really think about your investing strategy and goals before you get started. This will help you choose the type of platform and account features you will need.
2. Choose the right platform for you
Now you’re ready to choose a DIY platform or a ready-made portfolio. You can always change platforms at a later date, so don’t feel that picking your first stocks and shares ISA account is the most important decision in the world.
3. Start funding your investment ISA
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.
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 note 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.
Alternatives to stocks and shares ISAs
If after all this, you’re not sure a stocks and shares ISA is right for you, here are some other individual savings accounts that may be a good option for you:
A cash ISA has an allowance of £20,000 per year and are good options for anyone who may need access to their funds quickly.
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.
Lifetime ISA (LISA)
A lifetime ISA can be opened by any adult under the age of 40. Up to £4,000 can be invested in a LISA per year, which can be used for an individual’s first home purchase or their retirement. The government then adds 25% to all amounts invested. If you invest the maximum £4,000 in a Lifetime ISA per year, you will receive a £1,000 bonus.
You can put either cash or stocks and shares into a lifetime ISA.
If you’re only planning to save for a few years before buying a home, then the less volatile nature of a cash account may make more sense.
However, if you’re using your LISA to save for your retirement a few decades away, then stocks and shares should provide you with much greater growth prospects although their value will be more volatile along the way.
A junior ISA allows you to deposit up to £9,000 a year tax-free for your child under 18 years old. Junior ISAs become adult ISAs when your child turns 18.
You can put money into a savings account or into stocks and shares. If you want, your child can have one cash JISA and another JISA for stocks & shares.
But again, generally speaking, you might expect the long-term returns from a cash JISA to be lower than a stocks and shares ISA. But it’s likely to be less volatile.
Our ratings methodology for stocks and shares ISAs
With many stocks and shares ISA providers to pick from in the UK, our aim is to help you make the best choice for you. Our ratings are scored out of five stars and are based on the factors we believe are most important to the average user of stocks and shares ISAs.
Here are the factors we focused on in creating our ratings:
- 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 to compare stocks and shares ISAs
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.
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.
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.