Summary

• An ISA offers tax-free interest returns.
• A Stocks & Shares ISA is a tax-efficient investment account that offers a variety of investment options.
• The ISA allowance for the current year is £20,000.

ISA stands for Individual Savings Account offered to citizens in the United Kingdom in a bid to encourage them into saving and investing in public schemes. The basic difference between an ISA and a general savings account is that it offers tax-free interest returns. Therefore, you get more than what you have actually invested.

Individual Savings Accounts are of four types: Stocks & Shares ISAs, Cash ISAs, Innovative Finance ISAs, and Lifetime ISAs. A Stocks & Shares ISA is a tax-efficient investment account that offers a variety of investment options to the investors to helps them gain potentially higher returns on their savings in the long run. It is also known as an Investment ISA, and the range of investment options it offers include investment funds, investment trusts, individual shares, gilts and bonds. An investor may split his money in different types of ISA. He can save some in a cash ISA and invest some in a stocks and shares ISA.

The returns on the money invested in the ISA are free from the payment of capital gains tax or income tax up to a certain fixed limit. A notable thing to keep in mind while investing in Stocks & Shares ISA is that the overall value of investments may change, and in the long term, the investor may receive more or sometimes even less than what they invested due to fluctuations in the market conditions. It should be chosen as a long-term investment, with a minimum period of 5 years, but the investor gets an option to withdraw money from the ISA at any point of time.

The best thing about Stocks & Shares ISA is its easy accessibility and basic eligibility conditions. The investors do not need to be on the Wall Street for investing in the ISA, instead they can simply invest sitting at their homes with their phones by just meeting the two basic eligibility conditions, which are being 18 years old or above, and being a resident of UK for tax purposes.

The investor gets two options while investing in the Stocks & Shares ISA: investing in ready-made portfolios, or researching and buying their own shares.

How it works

For the tax year 2021-22, the annual ISA allowance or the upper limit for the amount of money to be invested in ISAs is set at £20,000, which may be invested in a single ISA or be spread across multiple types of ISAs. This upper limit may vary in every financial year (6 April to 5 April) as per the Government orders, and the investments become taxable if the set limit is breached. Most ISAs fall under the Financial Services Compensation Scheme (FSCS), which gives 100% protection to the first £85,000 per person per financial institution.

The investor should take into account certain charges and fees before deciding to invest in a Stocks & Shares ISA, as they have a significant influence on the overall returns and can erode value from the investments. These include fund management charges, account fees or platform fees, transfer out fees, and buying and selling charges. Also, the investor is recommended to pay off any pending debts with a high interest rate, set aside a rainy day fund in case of emergencies, and invest only as much as they can afford.

The major banks and building societies that provide Stocks & Shares ISAs include Natwest, RBS, Barclays Investor, HSBC, Santander, Halifax, Lloyds Bank, Nationwide Building Society, Skipton Building Society, Scottish Friendly, Shepherds Friendly, Virgin Money, Coutts, Bank of Scotland, and JP Morgan. 

The important factors to be considered while investing in Stocks & Shares ISAs are the types of investment, the expected rate of return from the investments, the willingness to take risks, and most importantly the fees and charges associated with the ISAs. These factors may have distinct impacts on individual investors, and affect their respective choices of investment. 

In case the investor decides to go for the investment option of ready-made portfolios, some of the best options available in the market are Fidelity Personal Investing Cost Focus Portfolios, Halifax Portfolio, HSBC Portfolio, Vanguard LifeStrategy Portfolio, and evestor. Fidelity is the best option for people looking for affordable investments along with an exceptional customer experience. It offers a total annual cost of 0.6-0.7% of the total investment pot, and has no exit fees. Halifax is better for investors who are looking for a few basic investment options, with simple choices for different risk tolerance categories. It also offers the same cost of 0.6-0.7% per year. HSBC portfolio is a suitable option for investments in low-cost multi-asset funds, with the cost lying between 0.28% and 0.40% a year. Likewise, Vanguard also offers a cheap investment option with a very low cost of 0.39%, while providing the investors with 5 risk levels to choose from. Evestor, on the other hand, is a better option for people who are willing to invest small amounts, with a minimum investment of just £1. It offers 3 risk levels to investors, with an average cost of approximately 0.49%.

On the other hand, if the investor decides to go for the investment option of researching and buying their own shares, some of the best options available in the market are Barclays Investment ISA, Trading212 ISA, Vanguard ISA, Aviva Stocks & Shares ISA, and IWeb. Barclays is the best option for people looking for a wide variety of cheap investment options. It has a competitive platform fees of just 0.2% for funds and 0.1% for any other assets on its platform, subject to a minimum amount of £4 per month. Trading 212 ISA is suitable for people who are willing to invest in just shares and want a free ISA with no trading charges. Vanguard ISA on the other hand is suitable for people who are willing to invest in just funds, mainly index funds and ETFs. It offers one of the cheapest platform fees in the market, which is around 0.15%.  Aviva Stocks & Shares ISA offers the best customer experience, with a platform fees in a range of 0-0.4% depending on the amount invested, with no fees for shifting to a competitor or closing the ISA. Lastly, IWeb, which is a part of Lloyds Banking Group, has no annual platform fees, but has a £25 one-off set-up fee. £5 per trade are charged on its platform for dealing in shares, but it is costlier to deal in funds. It offers a very cheap platform if the investor is careful in avoiding the charges related to non-qualifying investments.