Stocks and Shares ISA: Investing for Ordinary People

 

Do you have stocks and shares ISA?

(If you don’t have one, you must open an ISA account promptly.)

Statistically speaking, you probably don’t have stocks and shares ISA – in 2018-19, there were only 2.5 million investing ISA accounts in the UK. Furthermore, even if you have one, the probability that you have maxed it out this tax year is low – the average amount in an adult investing ISA (in the same year) was £9,331.

Consider that:

• Many have more than one stocks and shares ISA accounts. I, for instance, have three of those.
• Stocks and shares ISA is used chiefly by men over 45 years, and women and young people either don’t have one or have very little money.
• Women overwhelmingly (74%) prefer Cash ISA, which appeals to their cravings for safety but bleeds money, given the current low interest and high levels of inflation.

These numbers are not pretty. They whisper of people under-using the fantastic opportunity that is investing ISA – an extraordinary opportunity for everyday investors.

In this post, I will expand on why stocks and shares ISA is an excellent opportunity by:

• Introducing stocks and shares ISA.
• Discussing its relative merits when compared to other types of ISA.
• Setting out the essential rules of stocks and shares ISA.
• Outlining the benefits that make investing ISA an extraordinary opportunity for ordinary investors.

What is a Stocks and Shares ISA?

ISA stands for ‘individual savings account’ but don’t let this confuse you – there are different types of ISA, one of which is investing, or stocks and shares, ISA.

In brief, stocks and shares ISA is an investment account where you can stash £20,000 per tax year, tax-free.

Let us go a bit deeper here.

• First, ISA is not a platform, and it is not a specific investment; it is a type of tax-sheltered account. You can also think about it as a beautiful wrapping paper where you can keep different kinds of investments.
• Second, according to the rules, you can invest up to £20,000 per tax year from your after-tax income across all ISA types. This amount changes, but it is set to stay at £20,000 for 2022-23. Also, the individual tax year is from April 6^th till April 5^th.
• And third, all kinds of ISA accounts, including investing ISA, are tax-free. You don’t pay capital gains tax on investment returns, and you don’t pay tax when drawing down from your ISA.

Why is S&S ISA better than other types of ISA?

Let me tell you about the types of ISA first.

According to holdings class, there are three types of ISA:

• Cash ISA is where you can keep cash.
• Stocks and share, or investing, ISA where you can place individual stocks and shares, bonds, ETFs, index, or mutual funds and OEICs (Open Ended Investment Companies).
• Innovative Finance ISA (IFISA) focused on P2P (peer-to-peer) lending and was launched in 2016.

According to purpose, ISA can be:

• ISA adult accounts are the ‘normal’ ISA accounts open to any British resident who is 18 or over.
• Junior ISA is a tax-advantaged account you, or another adult, can open for children.
• Lifelong ISA (LISA) has a dual purpose of helping people save for buying their first home and retirement.

Furthermore, there is a choice of access that applies to Cash ISA only. These can be:

• Easy access where you can draw down any time.
• Fixed-rate where you lock your money with the provider for a certain period against the promise of a fixed interest rate (usually higher than the one offered by ‘easy access accounts’). You can fix it for a year, two years, or five years.

Here are the types and varieties of ISA:

	ISA adult		ISA Junior	Lifelong ISA
Cash ISA		x	x	x
Stocks and shares ISA		x	x	x
Innovative Finance ISA (IFISA)		x

 

Stocks and shares ISA is better than Cash ISA because of the expected returns. In 2020, the top-paying easy access cash ISA offered annual interest of 0.4%; fixed accounts (where you cannot draw down for between one and five years) offered interest rates between 0.5% and 1.15%. As a comparison, my Blue Whale Capital stocks and shares ISA returned over 20% in the same year. (I am not saying that you will always get this with all S&S ISAs. I am saying that if you invest wisely, you will likely beat the interest offered by cash ISA.)

Stocks and shares ISA is better than IFISA because of the risks involved. Providers of IFISA are not always approved by the Financial Conduct Authority and are not part of the FSCS. If the company holding your IFISA goes broke, you are not entitled to up to £85,000 protection. Both schemes generally cover S&S ISAs providers.

How much can you contribute to an S&S ISA?

You can contribute up to £20,000 per year to ISA.

Please note that this is your personal, tax-free allowance across cash ISA, stocks and shares, and innovative finance ISA.

Furthermore, within the same tax year, you can contribute to only one stocks and shares ISA. Although I have three S&S ISAs – a Nutmeg ISA, a Vanguard ISA, and a Blue Whale Capital ISA – in 2021-22, I can contribute only to my Nutmeg ISA. In 2022-23 I could choose to contribute to one of the others.

Here are some ISA rules you may want to check out.

How to open an Investing ISA?

To open a stocks and shares ISA, you must first select the investment platform you wish to use. You can get an ISA, including an investing ISA, from four groups of providers:

• Banks. While banks offer stocks and shares ISAs, they tend to rank poorly for customer satisfaction according to this Which review.
• Premium fund supermarkets. The most prominent players are Hargreaves Lansdown and Fidelity Personal Investing. Initially, these providers offered access to a range of investment funds; lately, they have expanded to 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 another form of automation, to build and balance investment portfolios. The best-known providers in this group are Nutmeg, Scalable Capital and Moneyfarm.

Opening a stocks and shares ISA account takes less than ten minutes typically. You will be asked to provide personal information, including your passport and national insurance numbers. Don’t be alarmed – this is to confirm your eligibility and help you deal with any tax implications.

(You may find that some providers will not accept you for ISA if you have US citizenship because of tax rules in the US.)

What investments can you keep in an Investing ISA?

You can invest in:

• Individual stocks (value investing and dividend investing)
• Index and mutual funds
• Unit and investment trusts and
• Exchange-traded funds (ETFs)

Most S&S ISA providers also allow some of your holdings to be in cash. The primary benefit of keeping cash in your S&S ISA is the same as in your overall money management – you always need money for opportunities.

Cash in your S&S ISA has another benefit. For instance, a couple of days ago, I transferred £5,000 to my Vanguard investing ISA because the end of the financial year was near, and I wanted to benefit from the 2020-21 ISA allowance (to remind you, this allowance is £20,000 across all types of ISA for the year).

Who can open S&S ISA?

Any UK resident 18 and over can open an investing ISA.

Can you have more than one Stocks and Shares ISA?

Yes, you can have more than one S&S ISA, and most investors have a portfolio of ISAs.

You can contribute to only one of your S&S ISAs within any given tax year.

Why is a Stocks and Shares ISA an extraordinary opportunity for ordinary investors?

Do you feel you know enough about stocks and shares ISA to take advantage of this opportunity?

Let me recap why I think that investing in ISA is an extraordinary opportunity for ordinary investors:

• A tax-sheltered account means you contribute from after-tax income, but you don’t pay tax on gains or drawdown.
• You can have stocks and shares ISA with digital wealth managers like Nutmeg, making investing easy. Or you can invest in index funds on platforms like Vanguard.
• You can automate your investing in digital wealth managers or index funds and contribute an amount every month. It is also known as ‘dollar cost averaging’ and is an approach to make your money ‘antifragile’.

I can probably go on, but this should be enough – I don’t want to overwhelm you. I want to help you see that opening stocks and shares ISA and contributing regularly is an absolute must.

Go open a stocks and shares ISA account now! Contribute regularly, max it out when you can and in several decades, you may join the ranks of ISA millionaires.