A stocks and shares ISA (individual savings account) is an account in the UK, that allows an individual to save or invest a limited amount within a tax-free investment wrapper.
You can invest across numerous types of investments such as company shares, funds, ETF’s, investment trusts or bonds.
It is generally considered that investing in these types of assets, will produce greater returns over the medium and long term period. As against simply holding cash within a deposit or savings accounts.
But be aware that the value of your investments can go up and down on a daily basis, depending upon where they are invested. You may get less back than your original investment amount.
By thinking long term, the market has returned around 8% per annum for the past 100 years. As we have all found out in recent times, the market will have some bad years. Such as tech boom and bust, banking crisis in 2008, Covid in 2020, and the Russia / Ukraine conflict starting in 2022. But generally over the long term your investments will grow more than inflation and a simple cash account held on deposit.
Who is eligible to apply for this type of account !
- If you are aged 18 and over
- You haven’t already subscribed to another in this current tax year.
- You haven’t exceeded the annual limit of £ 20,000
- A UK resident within valid NI number for tax purposes.
- or a Crown servant working outside the UK, or their spouse or civil partner.
How much can I contribute !
The amount you can contribute each tax year is £ 20,000 (so between 6th April to 5th April). This amount is set by the government, and the amount can be subject to change. But this current amount has been effective since 2017/18.
You can invest all that sum into 1 stocks and shares ISA. or you can contribute some to a Cash Isa, or a lifetime ISA. Plus you can have different ISA accounts across different financial companies. You have to stay within the limit of £ 20K across all providers each tax year.
If you put some funds into a Lifetime ISA, you have to be aged between age 18 to 39 when you open the account. Your annual contributions are limited to £ 4,000 each year. As an incentive the government will add a bonus of 25% so £ 1,000 and it can only be used towards a buying a 1st property. Or you can access from age 60 for retirement purposes. If you access this type of account for other reasons, you will be penalised, currently 25% of the amount withdrawn, So you could end up with less than you originally invested.
How can I open a stocks and shares ISA !
To open an account, you simply have to create a account with respective ISA provider. This can be done online in a a matter of minutes via a few simple clicks. Providing your personal details, such as name, date of birth, address, NI number.
Before you set up an account, do a quick comparison across various providers, what funds and investments do they offer, what fees and charges apply, is the website or app easy to use and navigate. Does their website offer lots of helpful tips, videos, online tutorials to help you if you are new to investing. Have they got a list of FAQ’s to assist you, what about a help page or live web chat if you have any problems or questions to ask them.
Which big name providers are available in the UK:
How much are the fees and charges !
Most providers will charge annual management or admin fees to run your account. There will also be a fee each time you buy or sell a holding. On top of the dealing fee, they will charge you stamp duty fee at 0.5% on each purchase.
I currently use http://www.ajbell.co.uk who charge a monthly fee based on my total portfolio valuation. This is deducted automatically from my account.
Management fees:
- For accounts below £ 250,000 – annual fee of 0.25%
- For accounts between £ 250,000 to £ 500,000 – annual fee of 0.1%
- For accounts over £ 500,000 – no annual fee.
Dealing fees per transaction:
- Buying and selling individual funds or ETF’s – £ 1.50 per trade
- Buying and selling company shares – £ 5.00 per trade
- Completing 10 transactions or more in previous month – £ 3.50 per trade.
I normally set a minimum amount of £ 100 for each trade to try and eliminate trading costs.
Am I ready to start investing !
Firstly, are you ready and comfortable making the leap into the world of investing. Or is it out your comfort zone. Before you invest have you created a simple cash emergency fund, or have you cleared any expensive credit card debt, or bank loan.
How much money are you prepared to invest, do you start off small such as £ 50 per month and as you get more comfortable do you increase your contributions.
How much are you prepared to invest, is it a set amount each month, or a % of your income.
I normally invest £ 250 per month at the start of each month, and whenever I receive odd bits of spare money, I will add that amount also as top-up. Normally in a simple transaction by debit card linked to my online ISA account.
The idea of investing should be seen as medium or long term, so are you prepared to lock in your money for the next 5 years for example.
How would you react if you invested some money and it lost it’s value in the first few weeks. Would you panic or see it as a short term blip, and how would you react seeing your portfolio in loss.
What type of assets or investments are you going to buy, will it be funds in a particular sector or country, or a global ETF or do you invest directly into individual companies. Are you able to do the research into those investments ahead of purchasing.
Simple illustration from my providers website, offering simple funds for beginners, under investing ideas to assist you.
What happens to any income or dividends held within the ISA !
Any income such as interest, dividends paid to you, will be credited into your ISA automatically by your provider. You are then free to invest however you wish, it could be in an existing funds or new holding.
With regard to funds, if you buy income funds the money is paid directly into your account. If you buy accumulation units, the dividends you receive are automatically invested back into the fund. So your holding will increase in value as the money is reinvested.
If you receive dividends from individual companies, you will receive the money in your account on distribution dates. Personally, if I receive dividend below £ 50 I will keep it as cash and then invest at a later date.
When, I receive dividend over £ 50, I will do something called dividend reinvestment, where the funds are automatically invested back into that company 2 days later. This can done by ticking simple box on website alongside a shareholding. This is normally for a small fee of £ 1.50, but it’s seen as free money. So will give me extra shares in that company, but the next dividend paid out will be a larger sum, as I hold greater amount of shares and most companies will increase dividend payments year of year.
So it’s a great way of compounding your portfolio to increase its value. I set an amount of £ 50 to make it cost effective, it may not be worthwhile to pay £ 1.50 in fees if the dividend is only £ 20 as an example. So try and eliminate unnecessary costs that have an adverse effect on the future growth of your portfolio.
What about the tax implications:
All dividends paid out, and any interest received within your ISA is tax-free within the investment wrapper. So you are not restricted by the Personal savings allowance, and you don’t pay income tax on them or have to declare them via self-assessment. So it’s a great way to receive money tax-free whilst saving on admin and paperwork with reporting to companies such as HMRC.
Can I access my funds at any time !
You can access your funds at any time and sell any holdings you have. Your money can be in your trading account on a few days. It can then be re-invested into new holdings. You can actually withdraw your funds to your stated bank account.
But think of investing as being for the medium to long term. Remember why are you investing in the first place ?
Is it for a specific purchase in future, such a new car, bigger house, home renovations or to retire earlier than state pension age.
Key points and takeaways !
- The stocks and shares ISA gives you great potential to earn money within a tax-free investment wrapper.
- Stocks, shares and funds normally perform much better than cash held on deposit.
- Through the power of regular investing and compounding, your investments will grow faster.
- Not limited on the amount of dividends or interest paid to you, no need to notify tax man or HMRC and saves on unnecessary paperwork or admin.
- This account should be seen as medium to long term, so be prepared to lock your money away for at least 5 years.
- Are you happy picking your own funds, shares etc, use the tools available to purchase simple low cost tracker funds when starting out.
- The world of investing appears to be confusing and complex. But use the tools on offer, investment guides, articles, hints and tips on your providers website to assist you.
Remember:
If you like this blog post, check out my other posts on http://www.moneyminted.co.uk which covers savings, investing, pensions and investment books that I recommend. So you too can improve your investing knowledge, financial education, so you can reach your investment goals in future.
It’s not a get rich quick scheme, but you will get there in the end if you create a plan, and think long term.
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