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Compare the best stocks and shares ISAs

Find out how a stock and shares ISA could help maximise your returns
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Investment ISAs put your capital at risk so this means you could get back less than you originally invested.
Author
Lucinda O'Brien
Editor
Salman Haqqi
Last updated
October 25th, 2024

What is a stocks and shares ISA?

A stocks and shares ISA - which is also known as an investment ISA and equity ISA - is a tax-efficient way to invest. They let you put your money into different investments with the bonus of tax-free returns. Therefore, it acts like a ‘wrapper’ as it’s the vehicle that helps you to invest. 

However, there are risks involved and it’s important not to get this confused with a cash ISA, as that’s a tax free savings account. 

The main difference between a stocks and shares ISA and a cash ISA is that instead of putting your money into a savings account you use your money to buy and sell shares in companies. You won't pay tax on the profits you earn and the investments held in a stocks and shares ISA. 

There is a limit to how much money you can invest in a stocks and shares ISA - for 2024/25 tax year it's £20,000.

Who should invest in stocks and shares ISAs?

Here are some groups of people who may benefit from investing in a investment ISA:

  • Long-term investors: If you have a long investment horizon (typically 5 years or more), an investment ISA can be a great option. It allows your investments to grow tax-free over time, providing the potential for significant returns.

  • Individuals looking to grow their wealth: Investment ISAs offer the potential for higher returns compared to traditional savings accounts, making it suitable for those looking to grow their wealth over the long term.

  • Those comfortable with investment risk: Investing in the stock market involves risks, including the potential loss of capital. However, over the long term, the stock market tends to provide higher returns compared to cash savings. If you're comfortable with some level of risk and can tolerate market fluctuations, an investment ISA can be a suitable option.

  • Individuals seeking tax efficiency: Investment ISAs offer tax advantages, including no capital gains tax on profits and no additional income tax on dividends received within the ISA. This makes them attractive for individuals looking to maximize their investment returns without the drag of taxes.

  • Investors looking for diversification: An investment ISA allows you to invest in a wide range of assets, providing diversification across different asset classes, sectors, and regions. Diversification can help reduce the overall risk of your investment portfolio.

  • Those who have maximised other tax-advantaged accounts: If you've already maxed out your contributions to other tax-advantaged accounts such as workplace pensions or Lifetime ISAs, an investment ISA can be a good additional option for tax-efficient investing.

Remember that investing in the stock market carries risks, and it's crucial to do your research or consult a financial advisor before investing."

The pros and cons of a stocks and shares ISA

Pros

A stocks and shares ISA has the potential to give you high returns
Returns are free from capital gains, dividend and income tax
There are a lot of investments to choose from

Cons

You capital is at risk is investments fall in value
There are usually fees and charges to invest, including exit, management and platform fees
You are capped at £20,000 to invest each tax year

The different types of stocks and shares ISA

Managed stocks and shares ISAs

Managed stocks and shares ISAs

This type of stocks and shares ISA means that an ISA provider will manage your investment and at a risk that you choose. It normally costs a bit more for these services but you’ll have advisers on hand to help.

Self-selected stocks and shares ISAs

Self-selected stocks and shares ISAs

If you are feeling confident about investing, then this is a good option to take control. A self-selected stocks and shares ISA means that you pick the investments yourself.

The different types of stocks and shares ISA

Managed stocks and shares ISAs

Managed stocks and shares ISAs

This type of stocks and shares ISA means that an ISA provider will manage your investment and at a risk that you choose. It normally costs a bit more for these services but you’ll have advisers on hand to help.

Self-selected stocks and shares ISAs

Self-selected stocks and shares ISAs

If you are feeling confident about investing, then this is a good option to take control. A self-selected stocks and shares ISA means that you pick the investments yourself.

The types of investments held in stocks and shares ISAs

Government bonds

These are debt securities issued by governments to raise capital. They are considered low-risk investments because they are backed by the government's ability to tax or print currency. Investors receive fixed interest payments (coupon payments) periodically and the principal amount upon maturity.

Corporate bonds

These are debt securities issued by corporations to raise funds for various purposes such as expansion, operations, or acquisitions. Corporate bonds typically offer higher returns than government bonds but come with higher risks. The risk level depends on the creditworthiness of the issuing company. Higher-risk bonds are often referred to as junk bonds.

Investment trusts

Investment trusts are closed-end funds that pool money from multiple investors to invest in a diversified portfolio of assets. They are called closed-end because they issue a fixed number of shares, which are traded on stock exchanges. Investment trusts are managed by professional fund managers who aim to achieve capital growth or income for the shareholders.

Unit trusts

Unit trusts, also known as mutual funds in some countries, are open-ended funds that pool money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or other assets. They are managed by professional fund managers who make investment decisions on behalf of the investors. Unit trusts offer diversification, professional management, and liquidity to investors.

Individual stocks and shares

Individual stocks and shares represent ownership in a specific company. When you buy shares of a company's stock, you become a partial owner of that company. Stockholders may benefit from capital appreciation if the stock price rises and may receive dividends if the company distributes profits to shareholders. However, investing in individual stocks comes with risks, including company-specific risks such as poor management decisions, competition, or changes in the industry.

Open-Ended Investment Companies (OEICs)

OEICs are open-ended funds structured as investment companies. They pool money from multiple investors to invest in a diversified portfolio of assets, similar to unit trusts. They are managed by professional fund managers who aim to achieve specific investment objectives such as capital growth or income. OEICs offer diversification, professional management, and liquidity to investors.

Exchange-Traded Funds (ETFs):

ETFs are investment funds traded on stock exchanges, similar to individual stocks. They hold assets such as stocks, bonds, commodities, or a combination of assets to track the performance of a specific index or sector. ETFs offer investors exposure to a diversified portfolio of assets with the flexibility of trading them throughout the trading day at market prices. They typically have lower expense ratios compared to actively managed funds. ETFs can be bought and sold like stocks, providing liquidity to investors.

Alternatives to stocks and shares ISAs

If you are saving for the short term then a normal savings account or a cash ISA would be more suitable than a stocks and shares ISA. 

However, if you do have long-term saving plans, then a stocks and shares ISA would work well compared to other types of investing. As well as the tax-free element you also get some extra protection from the fact it’s an ISA, which could be helpful. 

That being said, if you would like a tax-free alternative take a look at a lifetime ISA as this is also tax free and has good interest rates and a 25% bonus from the government. Take note that this ISA does come with restrictions and you only get the bonus if you use the money to buy your first house or after you turn 60.

If you aren't sure which ISA to choose, a chat with a financial adviser should help."

“Investment ISAs provide a tax-efficient ways to grow wealth through diversified portfolios, offering potential for higher returns and long-term financial security, though there is a risk that you may get less than you originally invested.”
Author image
Lucinda O'Brien
Savings expert

FAQs

How does Uswitch choose its editor’s picks?

We know that the best savings accounts are always changing, so the editorial team at Uswitch regularly checks the rates on this page and updates them at least fortnightly. To find the best deals we compare products by taking various factors into consideration, including the interest rate (AER), the balance needed to get the highest interest rate, minimum initial deposit, withdrawal conditions, and the term of the account. These factors change subject to the category of account. 

We use this system for the whole of the market covering nearly all account providers, so you can get an overview of what is available and compare savings accounts in the UK. All the banks featured are FSCS protected, so you can be reassured that your money is safe, provided it’s within the defined limits and regulations. To find out more about how FSCS looks after your money, visit fscs.org.uk.

Is my money safe in a stocks and shares ISA?

Most ISAs are covered by the FSCS so that means up to £85,000 per person, per institution is covered if your provider goes bust. It’s important to note that this doesn’t cover you if the investments lose value in the stock market.

Can I have more than one ISA?

Yes, you can have multiple stocks and shares ISAs and more than one cash ISA if you wish. You just need to split the £20,000 between the ISAs.

Can I transfer my cash ISA into an investment ISA?

Yes, if your ISA allows transfers then it would be fine, but there might be charges to do this.

How many years is best for investing?

If you are considering a stocks and shares ISA then it’s important to think long-term. This means at least five years, as the market can go up and down and you are more likely to lose money if you invest for a shorter period of time.

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About the author

Author imageLucinda O'Brien
Lucinda O'Brien
Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.

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