| Real Life Strategies for Building Wealth
  • Stocks and Shares ISA is as safe as the investments it contains.
  • Stocks and shares ISA offers unique tax benefits.
  • ISA allowance for 2019/20 is £20,000. This can be split between Cash ISA, Stocks and Shares ISA and Innovative Finance ISA.
  • If you have Stocks and Shares ISA and move to live outside the UK you need to inform your ISA provider.
  • The deadline to top up your Stocks and Shares ISA is midnight, April 5th.

When individual savings accounts (ISAs), including stocks and shares ISA, were introduced in the UK, back in 1999, these were meant to be a simple savings and investment instrument.

When I looked to start saving and investing it rapidly became clear to me that ISAs are anything but simple. Currently, there are six different types of ISA and numerous possibilities within these.

In brief, selecting and opening an ISA is not a trivial task; it is a minefield.

Here I’m not going to guide you through the rugged landscape of ISA – you can learn how to do that by reading this guide to ISA.

What I’d do instead, is to offer you the ultimate guide to pain (and tax) free stocks and shares ISA investing. Because, let’s face it, investing in a stocks and shares ISA is not only tax efficient; it is also an introduction to investing.

This guide to stocks and shares ISA investing is designed to be helpful to a whole range of investors: from absolute beginners to advanced intermediate. Hence, it starts simply and advances to the more complex ideas around stocks and shares ISA investing.

If you are a beginner, please make sure that you don’t skip important parts. Understanding stocks and shares ISAs is a bit like building a house – you are in serious trouble when you try to start from the roof.

If, on the other hand, you are a relatively advanced investor it is easy to skip to the parts that may be helpful to you – just use the table of content to jump about.

What is a Stocks and Shares ISA?

An individual savings account (ISA) is an arrangement available to individuals in the UK that qualified for favourable tax status. This means that contributions to the account are made from after tax income but these are not subject to income and capital gains tax; no tax is payable on money withdrawn from the account either.

It may make it easier to think about ISA (in general) as a nice wrapping paper that you could place around tour cash savings (Cash ISA), savings to buy a house (Help to Buy ISA), stocks and shares investments (Stocks and Shares ISA) etc.

What makes ISA different from other savings and investment arrangements is that it is tax-free.

Stocks and shares ISA is when you use the tax-free paper to wrap your stocks and shares investments.

I have to say that among the ISA family, I’m most partial to stocks and shares ISA and to Innovative Finance ISA – these are two ISA that magnify the tax-free effect of the instrument.

What can you hold in a Stocks and Shares ISA?

Stocks and shares ISA investing is fairly flexible in terms of holdings; still, it is not all permissive. Hence, you could use the lovely, tax free wrapping paper that a stocks and shares ISA is around the following:

  • Cash. You can hold cash in your ISA while deciding what to invest it in; otherwise it is not worth it.
  • Unit and investment trusts (should be careful with these because there are a number of conditions the trusts must meet).
  • Individual stock and shares. If this is your investing game, you can place individual stocks and shares in your ISA. These must be traded on one of the recognised stock exchanges.
  • Index funds. Index funds are portfolios of shares in companies that represent a segment of the market (e.g. S&P500, FTSE100 etc.).
  • Exchange Traded Funds (ETFs). ETFs are a basket investment that comprises stocks, commodities, bonds etc.
  • Government and corporate bonds. These are public debt securities.

How much can you contribute to a Stocks and Shares ISA annually?

The annual, tax-free contribution to ISA changes but for 2018/19 (and for 2019/20) it is £20,000.

And let me tell you, this is a lot given that we are talking about individual account and you contribute after tax income.

Please note that £20,000 is your total ISA allowance for a personal finance tax year. You can divide this between:

  • Cash ISA;
  • Stocks and Shares ISA; and
  • Innovative Finance ISA.

Why you should max your ISA allowance before investing in anything else?

There is a maze of investing options to choose from that it is easy to lose our way in it. My rule for investing, particularly for beginner investors, is simple:

  • First, contribute all you can to your pension. (Will tell you about this one some other time)
  • Second, max out your ISA allowance.

All other investments should come after these two.

Now, let me share the four reasons why, I believe, you should max out your ISA before thinking of investing elsewhere.

#1. Stocks and shares ISA is tax efficient

Tax evasion is morally bankrupt. Making sure your money affairs are conducted in the most tax efficient manner is smart.

This is where, investing in a stock and shares ISA, or any ISA for that matter, is hard to beat. (You can check out this comparison between a stocks and shares ISA and a SIPP account, if interested. If you are short of time, I can tell you that in the long run the ISA wins.)

ISAs are tax efficient in two ways:

#1. When you keep within the tax-free ISA limit, which is £20,000, any investment returns, and dividends, are not taxed.

#2. There is no tax when you withdraw money from your ISA.

Yes, I know that you contribute after tax income but still – as investments go, a stocks and shares ISA is very tax efficient.

#2. Stocks and shares ISA is flexible

Stocks and shares ISA is a very flexible investment vehicle.

Your choices are many.

  • One choice you’ll have to make is about what to include in your ISA –value and dividend stocks, ‘basket’ investments like ETFs and Index Funds, mutual funds or bonds.
  • Another choice is whether you’d like to tinker with the content of your stocks and shares ISA yourself or you’d rather delegate its management to the experts (will get back to this one later).
  • Do you prefer fully managed ISA or you’d rather have a fixed allocation one?
  • And you ought to select an investment platform for your ISA.

Apart from that, you can transfer your stocks and shares ISA were you to find a better provider or your requirements change over time.

What is important is that you don’t exceed the annual tax-free ISA allowance. Most else is flexible enough to accommodate even a fussy investor.

#3. Stocks and shares ISA is hard to ‘violate’

How often have you ‘violated’ your savings accounts in the past?

You know what I mean, don’t you? This is when you have a bit of overdraft and pull some money out of your savings to pay it off.

(Even I do this when life throws me a money curve ball.)

It is really bad idea to do this with stocks and shares ISAs – or any ISAs for that matter.

Okay, it is technically possible and it, in the case of stocks and shares ISA, could take up to 30 days to complete. Still, this is an obviously unwise money move because:

  1. investments in a stock and shares ISA start paying off after about five years; and
  2. once you withdraw money, you cannot replace within the same tax year thus wasting the tax advantages the instrument affords.

#4. Stocks and shares ISA can be great for ‘beginner investors’

Many digital wealth managers offer ‘off the shelf’ stocks and shares ISAs. If you don’t have much experience investing and would like your money to do better than lose 2% per year in a savings account, including in cash ISA, you can still start investing. Just look at stocks and shares ISA providers like Nutmeg, Scalable Capital and Vanguard.

Who can benefit from a Stocks and Shares ISA?

Investing in stocks and shares, and the different basket investments that use these as a basis, is generally best done long term.

This is because of the fluctuations in the stock market we have come to expect.

Research shows that a dip in the value of the stock market of up to 10%, or corrections, should be expected at least once a year. Dips of up to 40%, also known as a ‘bear’ market, usually occur once every four years or so.

Scary stuff, right?

Not really. The market recovers from a correction within weeks and from a ‘bear’ within months. You just have to forget your fear and stay invested.

To get back to our question, the people who can benefit from investing in a stocks and shares ISA are the ones who can:

  • Overcome their fear and continue investing during corrections and ‘bears’; and
  • Stay for the long run.

I’d say that the minimum time-line for stocks and shares ISA investing to yield benefits is five-six years.

Deciding what to include in your Stocks and Shares ISA

The decision what investments to place in your stocks and shares ISA depends on your experience, how much time and resources you are prepared to dedicate to managing your ISA investment, and the platform you select to host it.

If you have a history of success with dividend and value stocks investing and are a hands on investor dedicating considerable time to managing their portfolio – or prepared to pay a hefty sum to someone to manage it for you – by all means choose individual stocks.

If, on the other hand, you lack experience and/or favour more passive investments your choice must be index funds and ETFs.

Similarly, the mix of stocks and bonds would largely depend on how much risk you can stomach – the high the risk, the lower proportion of bonds your portfolio would contain.

How should you manage your Stocks and Shares ISA?

Here you have three choices, really.

You could decide to manage your stocks and shares ISA investment your self. This option earns full marks for taking responsibility. The downsides are that you need considerable experience to succeed. Also, you need to dedicate considerable time to researching your investments and re-balancing your portfolio.

You can opt to have fully managed stocks and shares ISA and outsource its management to the experts. This frees your time but usually comes with relatively high management fees. And we all know that fees erode the portfolio’s gain, right?

Finally, you could decide to open a passive stocks and shares ISA. There are three variants here:

  • Investing in index and mutual funds;
  • Investing with digital wealth managers using algorithms;
  • Investing in a fixed allocation portfolio.

My preference is for passive stocks and shares ISA investing.

Stocks and Shares ISA providers

Many financial institutions offer stocks and shares ISA. These roughly fall within four groups:

  • Banks. More and more banks offer stocks and shares ISA. According to Which reviews banks tend to rank poorly for customer satisfaction.
  • Premium fund supermarkets. Biggest players are Hargreaves Lansdown and Fidelity Personal Investing. Originally these providers offered access to a range of investment funds; lately they have expanded and offer shares and corporate bonds.
  • Stockbrokers. These providers come from the stockbroker tradition (e.g. Interactive Investor) offering resources for stock pickers. One thing to watch for with this group of providers is their fees – they charge a stockbroker commission on top of the account fee.
  • Digital Wealth Managers. These are also known as robo advisors and their distinguishing characteristic is that they use AI, or other form of automation, to build and balance investment portfolios. Best known providers in this group are Nutmeg, Scalable Capital and Moneyfarm.

Finally, I need to mention Vanguard as one of the worthy providers of stocks and shares ISA though it doesn’t fit neatly in any of the four groups mentioned above. You can select what you place in your ISA from a large number of index funds (both stocks and shares and bonds).

How to select a stocks and shares ISA (and provider)?

There are many things you need to decide upon to select the perfect fit stocks and shares ISA for you.

As already discussed, you must decide whether you keep individual shares or basket investments in your ISA.

Next, you must decide on whether you want your ISA to be managed (self managed or managed by a company) or passive.

As you can see, these decisions already narrow down your selection of stocks and shares ISA and ISA providers.

There is an element of selecting stocks and shares ISA, however, that we have not discussed yet – the selecting principles that apply to decisions regarding any investment.

According to Tony Roberts (in his book Unshakable) there are four principles that ensure that our investments are sound without being overly conservative.

#1 Risk awareness and potential loss

When you open, and contribute to, stocks and shares ISA (never mind the provider) you have to be aware that it is extremely unlikely it will only make profits. There will be times when the value of your ISA (your investment) will go down.

This is likely to mirror the dips in the stock market discussed above (remember that corrections of up to 10% and ‘bear’ markets are a fact of an investor’s life).

Your ISA doesn’t have to behave so erratically. Whether your ISA incurs losses at the top or bottom of those experienced by the market as a whole depends on the financial instruments that comprise it and the skill with which it is managed and re-balanced.

Please note that there are two kinds of risk associated with stocks and shares ISA:

  • Risks stemming from the volatility and unpredictability of the stock market; and
  • Risks stemming from the viability of the ISA provider.

To hedge both types of risk you must research and select your ISA provider carefully. Two matter to consider are;

  • How successful has the ISA provider been in delivering investment returns in the past? and
  • Whether the ISA provider is covered by the Financial Services Compensation Scheme which offers protection were the ISA provider unable to meet their obligations.

#2 Profit awareness or potential return

Profit awareness when selecting a stocks and shares ISA is important but not that easy to judge. One thing you could do is look at the returns that the provider has achieved historically.

Not perfect but still something.

#3 Tax/fee awareness

Taxes and fees can obliterate your earned interest; when compounded it gets really scary.

When selecting the perfect stocks and shares ISA for you, please make sure you understand all fees and taxes you’d incur.

Watch these fees. Some managed ISAs charge rather steep fees and even digital wealth managers split their fees in several categories.

Generally, Vanguard offers the lowest fees though this can vary depending on the index funds you select; followed shortly by the digital wealth managers.

Remember: the lower the fee, the better investment your ISA holding will turn out to be.

#4 Diversity awareness and diversifying your stocks and shares ISA

Any investor, even a beginner, knows that diversification reduces risk (there are caveats but we won’t get into these now).

When selecting an ISA you should make sure that it is diversified across:

  • Financial instruments: your ISA is a portfolio that can contain equities, bonds, real estate funds, commodities and cash. Usually the proportions would depend on your risk tolerance and the type of market.
  • Industrial sectors. Having a stocks and shares portfolio of companies from one sector is risky.
  • Location. Experience shows that the stock market rarely collapses globally at the same time. This means that if you own only UK companies (or US companies) you are exposed to rather severe drops in value. Owning shares in companies in different countries can lower the drop substantially.

The ideal stocks and shares ISA formula:

Ideal Stocks and Shares ISA = (Relatively) low risk + high (potential) returns + low fees + high diversity

Important, and underplayed, rules of stocks and shares ISA

I have been investing in stocks and shares ISA for close to a decade now. I’m usually careful to learn the rules – it comes handy when it is necessary to break them intelligently.

You’d think that I’m well versed with the rules of stocks and shares ISA, right?

Yep, I thought I know the rules well. Until, last year we nearly gaffed big time because I somehow had missed that you cannot invest in two ISAs of the same type in the same tax year. Go figure!

I nearly gaffed and than researched the less known rules of stocks and shares ISA investing so you don’t have to gaff as well.

Here the rules of stocks and shares ISA formulated as seven questions.

Can I sell my stocks and shares ISA?

Yes, but…

You must remember that a stocks and shares ISA is like the wrapping paper of a lovely piece of chocolate. You can wrap any kind of chocolate in it – index funds, ETFs, individual stocks and combination of these.

You can always sell the chocolate.

And you are asking the wrong question. It is not whether you could sell your stock and shares ISA but whether you should sell it.

Most people, sell their stocks and shares ISA when they:

  • need the money;
  • try to minimise their loss when the value of the ISA has declined.

You can’t do much if you need the money though dipping into your stocks and shares ISA is not ideal.

Selling because you fear loss, however, should be avoided at all costs. Remember that statistically downward stock market corrections recover in three to twelve months.

In brief: Yes, you could sell your stocks and shares ISA but you shouldn’t.

What happens to my stocks and shares ISA when I die?

Good question though I hope it won’t come to that anytime soon.

According to the old rules of stocks and shares ISA, were you to die your ISA would have lost its tax-free status. This means that your partner (or any beneficiary from your estate) would have had to start paying tax on any returns or income earned from it.

This rule changed in April 2015.

According to the amended rules of stocks and shares ISA, the tax-free benefits can be passed on by increasing the beneficiary’s tax-free allowance for the year of death to include the value of the inherited ISA.

For instance, if I die in 2019 John’s ISA allowance for 2019-2020 would be:

£20,000 + value of Maria’s ISA

In brief: Invest in stocks and shares ISA with no concern – your loved ones would benefit greatly from it without losing the tax-free advantages it offers.

Can I have more than one stocks and shares ISA?

This question has a short answer and a longer one.

In brief, yes can have more than one stock and shares ISA.

But, you must understand two things:

  • You can open one stocks and shares ISA, with a different provider, per tax year.
  • During a tax year you can contribute to only one stocks and shares ISA.

You can, however, split your ISA allowance between cash ISA, investment ISA and innovative finance ISA if it doesn’t exceed the yearly allowance (currently £20,000).

It doesn’t make much sense, I know. Still, splitting your yearly contribution between two stocks and shares ISAs may result in you losing the tax benefit on one of them.

In brief: You can have more than one stocks and shares ISA but can contribute to only one of them during any given tax year.

How risky is a stocks and shares ISA?

There are risks involved in very investment.

Your stocks and shares ISA is as risky as the investments you have in it. Oh, and you should add the risks that come with the viability of the platform offering ISA.

You can learn more about the risks that investing inevitably presents here.

In brief: Stocks and shares ISA is as risky as the investments within it.

How to calculate stocks and shares ISA fees?

It seems to me that most people miscalculate the fees they pay for their stocks and shares ISA.

It took me some time to realise that providers charge three kinds of fees:

  • Fees for administering your account;
  • Investment fund costs; and
  • Market spread costs.

For years I thought that my stocks and shares ISA fee is 0.75% when in fact it is 0.95%. Doesn’t look much but it adds up. And it is always good to know how much you ISA investing costs you.

In brief: Always check for fees above the management fee for stocks and shares ISA.

Can I have a joint stocks and shares ISA?

Here things are simple:

ISA is an individual account and you cannot open one in joint names or for someone else.

That’s it.

If you are concerned about what happens to your investment when you are gone, refer to the second little rule of stocks and shares ISA.

In brief: ISA is an individual investment account and it cannot be under more than one name.

Can I open a stocks and shares ISA with poor credit score?

Yes, you can.

Some believe that ISA providers refuse to open accounts on the grounds of poor credit score. This is not true – your credit score is important when you want to borrow money, not when you save money.

In brief: Yes, you can open a stocks and shares ISA with poor credit score.

Who can open Stocks and Shares ISA?

Any UK resident over 18 years old can open, and contribute to, stocks and shares ISA.

What will happen to my Stocks and Shares ISA if I move abroad?

If you open stocks and shares ISA and then move overseas you cannot contribute beyond the tax year when you moved. You should also tell your ISA provider that you are no longer a UK resident.

When does the financial year end?

In the UK, for personal finance purposes, the financial year starts on April 6 and ends on April 5.

This means that your deadline for contributing to your stocks and shares ISA for the current financial year is midnight on April 5th.

Not much time left, is it?

Finally…

Taking advantage of the tax-free benefits that stocks and shares ISA offers investors, both beginners and well versed, can be confusing.

Faced with so much choice, different options and rules, giving up altogether is tempting. Many, particularly beginner investors and/or women do give up.

Passing on the benefits that stocks and shares ISA investing offers is a great loss of opportunity.

This guide, hopefully, will help you dispel the confusion, select the perfect for you stocks and shares ISA and start building wealth for the life your want.

Reminder: You have until midnight, April 5th to top up your Stocks and Shares ISA.