A investment or Maxi Individual Savings Account (ISA) is a bit like a savings account where you invest your money into various stocks and shares.
However, unlike normal investment plans, any profit or return made on share price rises will not be subject to capital gains tax or income tax. If your money is invested in bonds, via the ISA, you will not pay tax associated with them.
ISAs were introduced by the government in 1999 to replace Tessas and Peps as efficient, tax-free savings tools.
Everyone in the UK, over the age of 16, has an ISA entitlement each year. An allowance of up to £5,340 is available for anyone who wants to invest into a cash ISA. For those who want to take more of a risk and invest in stocks and shares, an allowance of up to £10,680 is available. If you invested the full cash ISA allowance you are still allowed to invest up to £5,340 into a Investment ISA.
The ISA year runs from April 6th to April 5th. So, if you open your ISA account any time after April 6th onwards, you can continue depositing money into it until the following April 5th, when it will close for deposits. After this time it will continue to earn interest.
The ISA acts as a wrapper around your stocks and shares investments to protect them from being taxed. The most common way to invest in stocks and shares is to put your money into a collective shares tool such as a unit trust or investment trust. These are funds, run by fund managers, which invest in a range of stocks and shares.
You can also choose to invest your £10,680 directly into specific company's shares using a self-select ISA. This is usually done via stockbroker.
In both cases the investment has the potential, especially over the long term, to earn high returns as companies' share prices rise. However, investors could lose money if markets fall, especially if they choose to invest their money over a shorter period.
Who are stocks and shares ISAs for?
Stocks and shares ISAs are for people who are happy to take risks with their savings. Everyone is given an ISA allowance every year and almost all credible financial advisers would urge their clients to put an ISA wrapper around the first £10,680 they put into stocks and shares each year. It's the biggest tax efficiency rule in the book.
Pitfalls of Stocks and Shares ISAs
The most obvious drawback to putting your cash into a stocks and shares ISA is the risk factor. While you could earn bountiful returns if the markets soar, you could equally lose a lot of your savings if they fall.
The £10,680 limit is the absolute maximum and you cannot roll unused allowance over to the next tax year.
Equally, if you decide to sell the shares in your ISA that does not "free up" your allowance. If someone invested the full £10,680 into an ISA and then sold it they would not lose the tax benefits but they could not buy any more shares with that year's allowance.
Once you have put your money into a stocks and shares ISA it can only be transferred to another stocks and shares ISA. It cannot be transferred to a Cash ISA. So make sure you are confident when you sign up.
Where to buy Stocks and Shares ISAs
Investing in the stock market is a bit like taking a gamble so it's usually a good idea to speak to a financial adviser before making the move. They will look into your lifestyle and finances and assess your attitude to risk and find funds to suit you. Make sure you choose an adviser who is up-front about the fees they will charge you before you take their advice, however.
The funds themselves are usually run by investment companies, big insurance firms or banks. You can apply directly to them or go via an intermediary, such as a financial adviser, a stockbroker or a fund supermarket who will provide access to these funds using ISAs.