What is a Stocks & Shares ISA?

With so many options to choose from, it can sometimes feel overwhelming trying to figure out which investment opportunity could be the best fit for you.

If you’re thinking about taking steps towards reaching your future financial goals, investing in a Stocks & Shares ISA could be a great option to explore. This blog will offer an expert overview of Stocks & Shares ISAs and how easy it is to invest using one.

How does a Stocks & Shares ISA work?

‘ISA’ stands for an Individual Savings Account. Currently, you’re allowed to invest up to £20,000 per tax year into an ISA without paying Income Tax or Capital Gains Tax on any growth.

Unlike a cash ISA, which is more like a traditional tax-free savings account, a Stocks & Shares ISA allows you to invest in a range of different investment products such as stocks, funds, investment trusts or bonds.

When opening a Stocks & Shares ISA, you need to be aware of the following:

You can invest up to £20,000 in one tax year either as a lump sum or in some cases through smaller more frequent investments using a direct debit, however, this method isn’t always available so it’s worth checking with your provider.

You won’t have to pay any tax on growth within your Stocks & Shares ISA.

Investing in a diversified portfolio through a Stocks & Shares ISA rather than a singular company or stock could help mitigate the effects of volatile markets. However, it’s important to remember that good performance is never guaranteed and investing typically involves more risk than saving, as your money is exposed to the volatility of the markets you invest in.

Stocks & Shares ISAs are more suitable when being used for long-term goals.

The £20,000 allowance is shared between all the other ISA types you pay into.

It’s important to remember that, when investing, your capital is at risk of decreasing as well as increasing. Therefore, choosing a level of risk you’re comfortable with is imperative when it comes to investing in a Stocks & Shares ISA or any other investment product.

Unlike savings accounts, which advertise the rate of interest, ultimately there is no way to guarantee the returns you will receive when you invest in stocks and shares.

A Stocks & Shares ISA allows you to invest in a range of different investment products such as stocks, funds, investment trusts or bonds.

Who can open a Stocks & Shares ISA?

To be eligible to open a Stocks & Shares ISA, you need to meet the following criteria:

• You’re over the age of 18
• You haven’t exceeded your £20,000 ISA limit for the current tax year
• You must be a UK resident for tax purposes
• If you don’t reside in the UK, you must be a Crown Servant or their spouse or civil partner
• You haven’t already subscribed for another Stocks & Shares ISA for the current tax year

What are the benefits of a Stocks & Shares ISA?

If you are wondering why you would consider using a Stocks & Shares ISA, below are some of the benefits of opening this type of tax-efficient investment account:

• Tax-free investing: One of the benefits of an ISA is its tax-free status. You won’t pay Income Tax or Capital Gains Tax on any earnings within your ISA, making it a great way to potentially boost your savings without the burden of taxes.

• An easy way to start investing: Opening a Stocks & Shares ISA is a straightforward process that you can often do online directly with an ISA provider. If you would like additional assistance, you could consult with a financial adviser to guide you through the process.

• The potential for higher returns in the long term: Stocks & Shares ISAs can offer the potential for higher returns than Cash ISAs over the long term. This is because they aim to generate income through dividends and capital growth, where the value of your investments appreciates over time.

• A flexible investment opportunity: A Stocks & Shares ISA offers the flexibility to invest in a variety of funds, such as those holding shares, bonds and other assets. Alternatively, you can choose to invest directly in individual stocks.

What do I need to consider before opening a Stocks & Shares ISA?

When looking for the right provider for your Stocks & Shares ISA, here are a few things you should think about:

• Level of risk: Choosing a level of risk that you are comfortable with can help you achieve your financial goals when it comes to investing. However, you need to be aware that while there can be potential for greater returns you could also get back less money than you put in. At True Potential, we offer portfolios across five different risk levels, subject to a suitability assessment.
• Time invested: A Stocks & Shares ISA is usually a medium to long term investment, as time generally allows your money to grow while riding out volatility in the markets – though this cannot be guaranteed. Additionally, more time in the market can lead to other benefits such as compound growth.
• A globally diversified portfolio: Diversification can help to maximise opportunity for potential returns, while managing risk. If you are invested in a portfolio which is spread across multiple assets and investment styles, you could shield yourself from sudden market dips. For example, if commodity markets are down but European markets are up and you’re invested in both, your investments may remain stable overall as the peaks and troughs balance each other out.
• International assets: Changes in currency value can impact returns when it comes to international assets. For example, if you maintain an investment portfolio abroad and the applicable currency declines in value, it is likely the value of the portfolio itself will.
• Fees and charges: When choosing an ISA provider, it’s important to check on management fees, transaction costs and any other charges that may eat into your returns.
• Investment professionals: Investment and financial advisors have the experience and knowledge to navigate the markets and can help you make decisions which could benefit your investments.

Diversification can help to maximise opportunity for potential returns, while managing risk.

What is the difference between a Stocks & Shares ISA and a Cash ISA?

The two most known types of ISAs are Cash ISAs and Stocks & Shares ISAs. Cash ISAs grow in relation to interest rates, whereas Stocks & Shares ISAs grow in relation to the funds they are invested in.

In many instances, Stocks & Shares ISAs can offer the potential of a higher return rate than Cash ISAs over the long term. Many Cash ISAs offer a rate that will remain fixed for the duration of the fixed rate period. For example, HSBC offer a fixed rate of 4.15% AER, tax free. Based on an initial deposit of £1,000, the projected balance after 12 months would be £1,041. 50.

However, the value of your savings could shrink over time if interest rates cannot keep up with the higher inflation rate.

With a Stocks & Shares ISA, the returns you receive are directly linked to the performance of the assets held within the funds you are invested, with the aim of potentially generating more significant growth by investing your money in areas such as the stock market. Cash ISAs on the other hand provide an easy way to earn interest on your money.

And while the returns from Stocks and Shares are exempt from income tax and capital gains tax, there is no guarantee that they will outperform interest rates, alongside the element of risk attached to being exposed to the stock market meaning you may get back less than what you put in.

What’s right for you will depend on your circumstances and appetite for risk.

How many Stocks & Shares ISAs can I have?

There’s no limit to the number of Stocks & Shares ISA accounts you can open. However, it’s important to note that your total contributions across all ISAs cannot exceed the annual allowance, which is currently £20,000.

How True Potential can help you invest in a Stocks & Shares ISA.

If you’re wondering if a Stocks & Shares ISA is worth it and would like to know how to invest in one with True Potential, we can help. Our financial advisors can help offer you guidance and support through your investing journey. Feel free to get in touch today for more information.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors.

Tax is subject to an individual’s personal circumstances and tax rules can change at any time.

ISA eligibility and tax rules apply.

You should ensure your contribution does not result in your total ISA contribution within the tax year exceeding £20,000.

True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.

True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.

True Potential LLP is registered in England and Wales as a Limited Liability Partnership No. OC380771.