As interest rates remain low, you may be setting your sights beyond a cash ISA to boost your savings. Stocks and shares ISAs can give you greater returns for your money. However, there are potential risks to consider before dipping your toe in the water.
Are ISAs a good investment
Tax-efficient stocks and shares ISAs offer better scope for growth than cash, but how safe are they?
Why get a stocks and shares ISA?
There are many reasons why you might consider a stocks and shares ISA, including
Profit from investments is normally taxed. But if your investments are held inside an ISA wrapper, you’ll benefit from tax-free income, capital gains and dividends. This can be particularly valuable for long-term savers due to the benefits of reinvesting an asset’s earnings.
Reach your financial goals
If time is on your side, investing is one of the best ways to help you achieve your long-term financial goals. Almost certainly your investment will experience ups and downs along the way, but if you don’t need to access your money straight away there is plenty of time to ride out any market fluctuations.
The allowance has continued to rise
When they launched in 1999, stocks and shares ISAs had an annual limit of £7,000. In 2010 this increased to £10,200. But since April 6, 2017, you’ve been allowed to invest £20,000 in an ISA. You can put the full amount into stocks and shares or split it with cash.
Investing isn’t as scary as you might think
Many people are understandably worried about investing because they think it’s too complex and they have to be experts in financial markets to make money. But if you’re new to investing, there are some easy ways to get started. Ready-made funds that are expertly managed allow you to invest with as little as £20 a month.
ISAs are for everyone
ISAs used to be for over-18s only. Now you can set up Junior ISAs for your children – both cash and stocks and shares. That means more of your family’s money can be shielded from tax.
Things to consider before investing
It’s important to take some time to outline your objectives before you invest. Considerations should include
Risk vs reward
Stocks and shares ISAs are only a good investment if you manage risk sensibly. The greater the risk, the greater profit you’re likely to make but, on the flip side, the more likely you are to lose too.
Before you open an investment ISA, it’s worth taking an online questionnaire to assess your risk capacity.
Be prepared to keep your money in a stocks and shares ISA for at least 5-10 years to make the most of the tax breaks. There will be times when the value of your investments goes down but try not to panic. History shows us that when financial markets crash, they have always bounced back over time and eventually reached new heights. But, of course, you can’t be certain that the same will happen in the future.
Fees and charges
Stocks and shares ISAs come with additional costs, so always take these into account when planning your investments. Some managed funds can have high fees as you’re paying for professional expertise. You may also face administration charges, share buying and selling fees and transfer fees.
The golden rule of investing is to spread the risk. Your ISA can be made up of equities, bonds, property and cash. How much of each you have will depend on your risk tolerance. By spreading your money across a broad range of assets, you’re not relying on the success of one single investment.
You should also diversify across different industrial sectors and geographical areas. If you only own shares in UK companies in the telecoms sector, for instance, you’ll be more exposed to severe drops in value.