HOLDING all your money in cash when inflation is running at 3 per cent or more and interest rates are a meagre 0.5 per cent is probably not a good idea. And when the best cash ISAs are offering a rate of 2.8 per cent, the real value of your money is being eroded. So for those after a more substantial return and with the ability to withstand risk, stocks and shares ISAs provide a tax-efficient means of investing that uses your annual allowance fully – currently £10,200.
Both cash ISAs and stocks and shares ISAs are free of income tax, while investments held within a stocks and shares ISA are also free of capital gains tax (CGT). But despite their clear tax advantages, the uptake of ISAs is still relatively dismal. Research from Halifax shows that only one in three consumers has an ISA while just 10 per cent of the population actually have a stocks and shares ISA according to the Office for National Statistics (ONS).
Much of this low uptake is down to a lack of knowledge and confusion among consumers. So what is a stocks and shares ISA and how can you make the most of your full ISA allowance? There are two different types of stocks and shares ISAs. One is a self-select ISA, which allows you to buy single companies, managed funds and any listed products. The provider of this ISA will charge an annual administration fee and will also levy a transaction fee when you buy individual shares. This is regularly around £12 per transaction with the big stockbrokers. To get a self-select ISA, you are best off going directly to a stockbroker such as Hargreaves Lansdown.
The second type of stocks and shares ISA only invests in funds. Since you are putting money into unit trusts, this tends to be via fund supermarkets, which won’t levy a charge for the ISA wrapper itself, says Adrian Lowcock, senior investment adviser at BestInvest. He adds that you may be charged an initial commission but that this may be avoided by going through an independent financial adviser (IFA). There is likely to be an annual management charge of up to about 1.5 per cent.
So once you’ve got one, how do you go about using your stocks and shares ISA? If you already have investments you can reinvest them within an ISA wrapper. You will need to sell your holdings and then buy them through the ISA. While this creates a chargeable event, an annual CGT allowance of £10,100 means the chances of you paying this are quite remote, says Lowcock.
If you are investing, then there are two rules of thumb you should remember. First, before you start investing in the financial markets you should generally have around three times your monthly salary held in cash. While this depends on your personal circumstances, it means you have a buffer if your investments don’t work out. Second, you should have no less than £1,000 in any one fund and no less than £2,000 in a single share. Any less and the fees will start to erode your potential gain.
If you want to transfer your stocks and shares ISA you can do so but only to another investment ISA – you are not allowed to transfer the balance into a cash ISA. You can, however, transfer your cash ISA into a stocks and shares ISA. If you are using a fund supermarket for a funds ISA, then you don’t need to change the ISA wrapper, you can just change the underlying investment. However, if you have a self-select ISA and want to transfer, then you can do so. But there are usually exit penalties and it will take around 30 days to complete the whole process. Two weeks is considered fast.
If you have investments already, you should use the tax-efficient ISA wrapper to help you grow your savings pot.