What is a stocks and shares ISA?

Stocks and shares ISAs have the potential for higher returns than cash ISAs, but you have to be willing to take some risk with your savings.

How does a stocks and shares ISA work?

Sometimes called an investment ISA, a stocks and shares ISA is a tax efficient way of investing in the stock market.

Your savings will be sheltered from income tax and tax on any capital gains you make if the value of your investments rise.

The tax benefits can be significant, especially if you’re a higher or additional-rate taxpayer.

You can either pick the funds and shares you want to add to your portfolio yourself or choose ready-made funds where the decision-making is done for you. 

How much can I invest in a stocks and shares ISA?

Stocks and shares ISAs have the same annual allowance as cash ISAs. For the tax year 2018/19, the threshold stands at £20,000. You can put your whole allowance into a stocks and shares ISA or split it with a cash ISA. You can’t roll your ISA allowance over to the next tax year, so you either use it or lose it.

You can choose between making a lump sum investment and/or regular monthly payments. The minimum value of any lump sums and/or regular monthly payments can vary depending on the ISA provider. 

What can I invest in?

A stocks and shares ISA allows you to invest in a wide range of investment products, including:

  • Funds: These are typically unit trusts or Oeics (open-ended investment companies). They allow you to diversify your investments, so you spread the risk. They’re typically grouped into geographical regions or market sectors.
  • Individual shares: You buy shares in a single company listed on the stock market. If the value of that company goes up, so does the value of your investment. But if it falls, the value of your shares do too.
  • Bonds: With this type of investment, you’re basically lending money to a company or government in return for interest on the loan which is paid back to you on a set date.

How risky are stocks and shares ISAs?

All investments come with an element of risk, so you have to make your decisions based on your current financial situation, long-term goals and appetite for risk. The stock market can be unpredictable, so never invest more than you can afford to lose.

That said, some investments are riskier than others. For instance, buying shares in emerging markets is generally considered less safe than buying bonds in UK blue-chip companies – but the rewards may be greater.

Are there any charges for investing in a stocks and shares ISA?

As with all investing, the fees will vary depending on what you invest in and which provider you use.

You’ll be charged every time you make a trade, while unit trusts and Oeics come with ongoing charges. You may also have to pay an annual service fee to use a share dealing company’s platform.

Can I transfer my cash ISA to a stocks and shares ISA?

Yes. Money held in a cash ISA can be transferred to an investment ISA, although there may be a transfer fee involved. You don’t have to move all your cash – many people choose to split their savings between cash and investments.

Not all ISA providers accept transfers so find one that does and fill out an ISA transfer form. Don’t just withdraw the money yourself though as you’ll lose the tax-free benefits of your savings pot.