Stocks and Shares ISAs
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Stocks and Shares ISAs
Kwasi Yeboah discusses the ins and outs of stocks and shares ISAs.
What is an ISA?
The term ISA simply stands for individual savings account. In essence, an ISA is a glorified savings account with a few tax privileges thrown in for good measure.
The most common form is a cash ISA. It is a savings account, where you pay money in and any interest is tax free. Whilst interest rates have risen slightly from historic lows, the value of cash savings in real terms is still being considerably impacted by inflation. ISAs, however, are able to hold more than just cash.
A stocks and shares ISA is an ISA that can hold different types of investment. These may be company shares, investments in funds or trusts, corporate bonds and property funds, in addition to cash.
Over the medium to longer term, these investments historically may have grown faster than the return you may get on cash. Plus, all this additional growth is protected from tax whilst held in the ISA and when you withdraw your money.
When might you need an ISA?
The only requirements to open a stocks and shares ISA is that you are over the age of 18 and a UK resident. You must also understand that there is an element of risk involved with any investing. If you are completely risk averse, that is, against taking on any investment risk, a stocks and shares ISA probably is not going to be for you.
But if you want the opportunity for your investments to grow faster than inflation, making use of a stocks and shares ISA is sensible.
What investments are held in stocks and shares ISAs?
It is open to all of the main asset classes, so you can actually hold cash in a stocks and shares ISA, plus fixed interest, property and equity. Most commonly, people tend to make use of pooled investments, such as funds or multiple funds to help them diversify. But as always, it is important to seek advice if you are not sure.
How do stocks and shares ISAs work?
Every UK adult has an ISA allowance of £20,000 each year. Any growth in the ISA is free of tax, and the money you take out of an ISA is also tax free. Keeping this growth within the ISA wrapper allows it to compound.
That is what makes a stocks and shares ISA such a great planning tool. It means someone saving and investing over a 30 year period could draw a tax free income in addition to any pension that they have in retirement.
Which stocks and shares ISAs should I pick?
It is a difficult question to answer. I would say whichever one you like that suits your investment needs. There are countless ISA providers out there these days, slightly fewer stocks and shares providers, but still plenty.
Everyone has different investment needs. Some people need providers who offer access to individual companies – to single stock investments – whilst others are happy with a selection of funds at their disposal. Some individuals also want those decisions to be made for them, and just to tell an ISA manager what level of risk they are happy to take on.
How much do stocks and shares ISAs cost?
Relatively little, actually, because there are so many of them, which means competition has driven the costs down. Different providers have different charging structures, it really comes down to what you need.
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What are the tax advantages of stocks and shares ISAs?
When it comes to saving and investing, there are largely two taxes to consider: income tax and capital gains tax. Income tax applies to any interest that you may receive on cash or bonds, or dividends that you receive from shares.
Capital gains tax, meanwhile, relates to any growth you gain from these assets. If they grow in value over time, you may have to pay capital gains taxes on the disposal proceeds.
Stocks and shares ISAs effectively protect your savings and investments from any of this tax. There is no tax to pay on any interest, no tax to pay on any dividends and no tax to pay on the growth of your investments.
If you held these outside of an ISA, you could be liable for tax on all of it. So they are really an effective planning tool.
Are stocks and shares ISAs safe?
There are a couple of things to consider here. The first is the financial security of the ISA provider. Consumers are offered a degree of protection by the Financial Services Compensation Scheme, which effectively means that should your ISA provider go bust, the first £85,000 of your investments will be protected. So they are safe in that regard.
The next thing to consider is a little bit more difficult and comes back to something we touched upon earlier, which is investment risk.
No investment is completely risk free. Even investing solely in cash exposes you to inflation risk. That is the risk that the purchasing power of the pound in your hand will be weaker in the future as prices rise.
But there is nothing risky about the stocks and shares ISA itself. The ISA is just a basket, if you like, to hold your investments in. It is what you put inside that basket that has the risk attached to it.
How else can First Thought Financial Services help?
In addition to stocks and shares ISAs, there is a huge range of tools that we use here at First Thought Financial Services thanks to our relationship with Quilter Financial Planning.
Because of that, we are able to review your situation and circumstances and advise you on how to reduce your tax liability as well as grow your money.
For ISA’s Investors do not pay any personal tax on income or gains but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA manager . Tax treatment varies according to individual circumstances and is subject to change.
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