Let’s talk about Stocks and Shares ISAs. The best (and super easy) way to grow your money over time. Don’t worry if you don’t know anything about stocks and shares, you don’t actually need to know anything to enjoy the huge benefits – it’s all managed by experts for you.
By putting your head-earned dough into a Stocks and Shares ISA, it’ll make you a lot more money in the long-term than any other savings account. Interested? Let’s go through everything you need to know and how to get started.
If you just want to know the best Stocks & Shares ISAs, skip ahead here.
What is a Stocks & Shares ISA?
What is an ISA? And why are a Stocks & Shares ISA so unique? Well, ISA stands for ‘Individual Savings Account’, and it’s a savings account with one massive benefit – you don’t pay any tax at all when your money grows.
Let’s explain the basics…
Usually, if the money in your bank account earns interest, the government counts it as income (i.e. money you earn) and you have to pay tax on it.
With normal savings accounts, that aren’t ISAs, you pay tax every year on interest over £1,000 if you’re a basic-rate taxpayer (earning between £12,571 and £50,270 per year) and on interest over £500 if you’re a higher rate taxpayer (earning £50,271 or more). These limits are your Personal Savings Allowance (PSA).
However, to encourage saving, UK residents get an annual ISA allowance, which means that you can put a certain amount into ISAs each year without paying any taxes at all on the extra money these accounts make. How good is that?! This allowance is currently £20,000.
How is the Stocks and Shares ISA different from other ISAs?
Firstly you can make a lot more money with a Stocks and Shares ISA than you can with any other type of ISA. How come?
With a Cash ISA (a type of ISA where you just save your money and it makes interest), the ISA provider (that’s the company who manages your ISA, for instance a bank), will decide the interest rate you get, and at the moment these are terribly low, meaning your money doesn’t grow much in your account, currently the best you’ll find are between 1% and 1.75% per year, but most are a lot less.
However, with a Stocks and Shares ISA, where your money is invested by experts, your money grows based on how things are going with the stock market – such as businesses becoming more valuable. Over time this makes you way more money (and we mean waaay more).
Explainer: Stock markets are where stocks and shares (very small ownership stakes in companies) are bought and sold around the world. Generally, if the companies that you invest in do well, the value of those shares go up. When you come to sell them in the future, you will get more back than you invested in the first place.
Imagine it like this: Your regular Cash ISA or savings account is like a safe kept with an ISA provider. It’s yours, and you can either put more money into your safe or take it out when you need to.
With a Stocks and Shares ISA, you still give your money to your ISA provider, but instead of keeping it locked in a safe, they make sure it gets invested smartly in the stock market. It’s all handled by experts that know how to grow money safely over time, so you don’t have to do anything.
When you put more money into your Stocks and Shares ISA, you’re asking your ISA provider to invest (buy) more. When you take your money out of your account, your stocks and shares are sold and you get the money they make from selling them.
And there’s an extra financial bonus when it comes to Stocks and Shares ISAs:
If you owned shares in a company and they grew in value, you’d have to pay something called Capital Gains Tax. That’s because the extra money (or capital) you make is growing (or gaining) – in other words, money you’ve made. But, if you’ve put money into the stock market through a Stocks and Shares ISA and your investment grows (hopefully by a lot!), you don’t have to pay this, or any tax at all.
How does a Stocks & Shares ISA work?
When you put your money into a Stocks and Shares ISA, you’re not strictly saving — you’re investing. This means your cash is used by your ISA provider for investments in:
- Stocks and shares, which are ownership stakes of individual companies. These are bought and sold (called traded), and typically grow in value when a company does well, and the value of the company increases.
- Bonds, which is letting companies or governments borrow your money. You earn money when that loan is repaid with interest (when the bond ‘matures’). Similar to when you borrow money from the bank and you pay interest.
- Property, which for ISA investments is often investing in commercial property, like office buildings, shop etc.
- Exchange-traded funds (ETFs), which can be a combination of all the above, or more commonly just a group of shares. They are often a group of businesses in a similar industry, or a group of large successful businesses, such as the top 100 companies in the UK. You can then buy a share in the fund, rather than all the shares individually. And, these are traded on stock exchanges too, just like shares.
What can I earn from a Stocks & Shares ISA?
The average returns on a Stocks and Shares ISA recently hit 13% per year. If you’d invested your full £20,000 that year, you may have been up £2,600. That’s wildly different from a Cash ISA, which would have made you at best £350, if you had the best interest rate of 1.75%.
Bear in mind that even if your returns aren’t quite this high, you’ll still come out with a really healthy payback over the course of 5-10 years, 8% per year on average is often used as a rule of thumb. Stocks and Shares ISAs are a long-term play, so even if the stock market fluctuates, you’ll ride it out and should come out on top.
Put simply: you can’t guarantee how much you’ll earn from a Stocks and Shares ISA, but it’s fair to say that it’s likely to be a heck of a lot more than you would earn with a Cash ISA.
Who can open a Stocks and Shares ISA?
If you’re a UK resident over 18 years old, or a crown employee living/working abroad (for example, if you’re in the armed forces), you can open a Stocks and Shares ISA.
You don’t have to pass an economics exam, or bring a list of stocks and shares yourself (although some ISA providers let you choose exactly where to invest your money – for example Freetrade). And you don’t need to check how the stock market does each day. It’s all handled for you by experts. You can just sit back, relax and watch your money grow over time.
Is my money safe in a Stocks and Shares ISA?
Your money is extremely safe in any type of ISA. If your ISA provider goes out of business (which is extremely rare of course), you’re protected up to £85,000 by something called the Financial Services Compensation Scheme (FSCS). In addition, as your money is in the investments themselves, you have extra protection and they would still exist and be all in your name, and they can only be returned to you.
The money you invest can go up and down with this kind of ISA. This is the reason why a Stocks and Shares ISA makes most sense when you want to set your money aside for 5 years or more, because over time there will be more ups than downs. This means you’ll ride out the bumps and your money should grow over the long-term, providing it is invested wisely (tip: just use an expert-managed Stocks & Shares ISA to make investments for you – more on these below).
The types of Stocks and Shares ISAs
There’s only 2 main types. You can go for an ISA managed completely by the experts, you just sit back and watch your money grow. Or, you can opt for a ‘do-it-yourself’ Stocks and Shares ISA, where you’d pick the investments you want to make.
If you’re a beginner to Stocks & Shares ISAs, go for an expert-managed ISA. And, even if you’re a savings pro, it’s often best to use an expert-managed ISA too – let the experts do all the work, you just sit back and relax.
If you wanted more control over your investments, such as buying shares in a specific company or a specific fund, then a self-managed ISA might suit you better.
Let’s get into each type a bit more…
Expert-managed Stocks & Shares ISAs
These are your ‘standard’ Stocks and Shares ISAs, and if you’re new to investing these are the ones for you. All you need to do is add money!
The Stocks & Shares ISA provider you choose will work with an investment fund and those experts will take care of everything related to how and where your money is invested – which will normally be invested in shares across a wide range of large, successful companies normally via investment funds (exchange-traded funds, ETFs).
With some ISA providers, to make things even simpler and cheaper, you can opt for a ‘robo-advisor’. This is where the computers take over, and determine which companies and funds your money is invested in. Don’t fear though, they’re actually really good at making money!
This is actually quite rare though, most robo-advisors are actually run by people – it’s just become a term to cover expert-managed ISAs that use technology such as an app or website.
Self-managed Stocks & Shares ISAs
Think of yourself as a pro? Know your Apples from your Blackberrys? Or maybe, you’re ready to learn a bit more about investing.
A self-managed ISA gives you control of your money so that you can manage it all yourself – that means choosing, buying and selling investments.
You won’t be using the same ISA provider as an expert-managed ISA, you’ll need one that acts as a broker, which is a company that buys and sells stocks and shares for you from stock markets around the world.
Ethical Stocks & Shares ISAs
There’s also an increasing variety of Ethical Stocks & Shares ISAs out there. Investing in an ethical ISA means you know your cash won’t be invested in companies that damage the environment (so no oil companies etc), treat their workers badly, or take part in any other nasty shenanigans. It’s definitely the way forward to a healthier future, and the investment returns are just as good, in fact often better!
How to get a Stocks & Shares ISA
Opening a Stocks and Shares ISA is not so different from opening any typical savings account.
To get started, you’ll typically apply and manage everything directly from an app on your phone or through a website – it’s really as simple as that. You just download the ISA providers app, or head to their website and get started (our recommendations are below).
Plus you can use the app or website to get full transparency of your money, whenever you like, with up-to-date balances, and without ever having to speak to anyone (unless you want to of course!).
Once the account is set up, you simply transfer some money into it and you’re all set. We’d recommend you also set up a regular automatic payment into the account too (also known as a standing order) – you’ll be surprised how quickly your money builds up.
We’ve also done the hard work researching the best ISAs for you too, here you go…
The best Stocks & Shares ISAs
The best Stocks & Shares ISAs for beginners
Beginner to saving and investing? No problem! You’ve made a great decision to start. Investing is the best way to grow your money over time – however that doesn’t mean buying anything and everything!
If you’re a beginner it’s best to let the experts handle things for you until you learn more about investing – although it’s still a good idea to let the experts handle things if you do know what you’re doing!
Here’s the best Stocks & Shares ISAs for beginners: