Stocks and Shares ISA

An ISA is a savings account which enables you to save a certain amount of money each year on which your interest will be tax free. There are certain types of ISA including a Cash ISA where you save money in your account and a Stocks and Shares ISA which is where you are investing money. A stocks and shares ISA can also be known as a FTSE tracker.

The amount of money that can be invested in a stocks and shares ISA each year is £10,200. The investor can put his money into the ISA and will be able to achieve tax free growth on his funds by investing in things such as index trackers, individual equities or government bonds.

The difference between a cash ISA and a stocks and shares ISA is the fact that a stocks and shares ISA should really be a long term investment. It is normal for stocks and shares ISAs to be for a period of around five years. The money invested in this type of ISA would normally be tied up for that length of time in order for the investor to receive a favourable return. If you thought that you couldn’t leave your money for that length of time, then you should not really choose a stocks and shares ISA. If you wanted to avail of the benefits of tax free savings in the short term, then you would be better off with a cash ISA.

There are a number of different types of stocks and shares ISAs that you may be interested in. An index tracker is an investment which tracks a financial index such as the FTSE. This is a very popular choice because it is quite easy to follow and the charges involved are not too high. You could also choose a similar product which is a protected index tracker. The difference here is that the amount of money that is invested is protected but the amount of profit that you can make has a cap on it.

A fund of funds product is where you use the services of a fund manager who will invest your money into other funds. The charges for this service are quite high but the risk involved is lower. Balanced manager funds is a similar product to fund of funds. However up to 85 percent of the amount of money invested can be put into equities.

You can also employ a fund manager to invest in equity funds. The charges that you pay for this will be higher but if you get a good funds manager who knows his stuff, you could get a much higher return on your investment. An equity funds manager will invest you money in equities that he thinks are going to do well.

So if you have money that you can afford to be without for at least five years, then you should really think about a stocks and shares ISA. The one that you choose will be determined by how much level of risk you are prepared for. Obviously there is more risk involved in any stocks and shares ISA than there would be with a Cash ISA. If you want to invest your money but are worried about your capital, you should opt for a protected index tracker.

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  • What is a Stocks and Shares ISA?
  • A stocks and shares ISA is not the same as a cash ISA. Instead of saving up cash, you are actually investing your money and you do not have to pay capital gains tax on the money you make. Products which you can invest your money in include, government bonds, unit trusts, investment trusts and OEICs (open ended investment companies). You will not have the same level of security that you would have with a cash ISA as your money could go up or down, but you do have the potential for a bigger return on your investment. The amount you can invest each year is £10,200 and you could also choose to buy shares yourself with this money.
  • How Do Stocks and Shares ISAs Work?
  • A stocks and shares ISA is different to a cash ISA in that they are not completely free from tax. With some types of stocks and shares ISA such as OEICs or unit trusts, you will only benefit from them being tax free if you normally pay a higher rate of tax or if you would be liable for capital gains tax. However if your ISA is used to buy corporate bonds, then the interest you make will be tax free no matter what rate of tax you normally pay. You will have to pay charges when you choose a stocks and shares ISA and these are used to pay for things such as administration fees, fund managers or commission to financial advisors. The charges you pay will be different depending on the type of stocks and shares ISA that you choose. You can make a lot of money from a stocks and shares ISA, but you must be prepared to leave your money tied up for a few years and you should be prepared to see your money go down as well as up
  • What to Look Out For?
  • There is a certain element of risk involved with a stocks and shares ISA so you should be aware of this before investing. Even though you can make a higher return with a stocks and shares ISA than a cash equivalent, your capital could be at risk. If you are worried about this then you should choose a protected index tracker. But be aware that the amount of profit that you could make will be capped. You should also be prepared to leave your money untouched for at least three to five years. You would not get the maximum return on your investment if you did not leave your money for at least that period. A cash ISA would be a better choice for those who need to have instant access to their money. It can be quite confusing to invest in a stocks and shares ISA so you might need to get advice from an independent financial advisor. And of course there are charges that you will have to pay when you opt for a stocks and shares ISA.