“Everything I’ve learnt about ISAs”

What is an ISA?

Does the term ‘ISA’ make you glaze over? Do the words ‘stocks and shares’ conjure up images of smart City slickers? It doesn’t have to be that way. The ISA is simply the tax-free Individual Savings Account Link opens in a new window.

What is a Cash ISA?

A cash ISA Link opens in a new window pays interest (not a lot these days!) and an easy access cash ISA (rather than a fixed term version) is ideal for your short-term savings – a holiday fund or rainy-day fund.

What is a Stocks and Shares ISA?

A Stocks and Shares ISA Link opens in a new window invests your cash in the stock market and gives you more chance to fund the longer-term goals and dreams in your life. But remember, there are no guarantees and you shouldn’t invest money you would be devastated to lose.

What’s it invested in?

It can be invested in stocks and shares (which are actually the same thing) and in other assets. These are the building blocks of investing, and include:

1. Shares, where you own a little slice of a company and it may pay you a dividend
2. Bonds, where you loan money to big companies and governments and they pay you a guaranteed return over a fixed period.
3. Gilts, which are the UK government’s bonds. These are the safest assets, at the bottom of the risk ladder. Next come bonds, then shares, then…
4. Property, and commodities such as gold.
   In case you were wondering, your ISA can’t include Bitcoin, which would be off the risk scale!

Who does the investing?

You can do it yourself, researching and picking individual shares or other assets, or you can buy a fund. The Stocks and Shares ISA allows you to pick from a big menu of funds out there, each with a different mix of assets and therefore a different risk rating. Think of it as a curry menu, from mild to spicy. The milder funds go bigger on bonds and gilts, offering a higher safety rating but lower returns. The spicier funds are heavier on equities – that’s the company shares, which deliver stronger returns but with more risk. Your job is then to choose a fund at the right risk level for you.

Can I access my money?

Yes you can. But it might not be a good idea. You need to give your money time to benefit from the long-run trends of the stock market – five years at least and preferably more. The longer you are invested, the more easily you can smooth out the bumps that come with the stock market ride, and the more likely it is you will make decent returns that will outstrip inflation – and beat those cash ISAs.

Is risk-taking a personality thing?

Some companies use online questionnaires aimed at discovering your attitude to risk (like Financial Expert Link opens in a new window), which will typically steer you into one of five risk levels, from cautious to adventurous. MoneyHelper has a guide to assessing your own risk appetite Link opens in a new window. But remember that if you are serious about building your ISA for the medium to long term, the longer your timescale, the more risk you can afford to take. Where your personality comes in is when the stock market is wobbling, financial news seems scary, and your ISA is heading downwards and wiping out some past gains. That’s when you have to keep your cool. As long as your goals haven’t changed, stay invested and remember you are in for the long haul.

Any rules I need to know?

1. You can put in up to £20,000 into an ISA in any tax year. If you’ve ever heard of ‘ISA millionaires’, that’s how they do it, investing the maximum and without ever paying any tax.
2. It can be split between different types of ISA.
3. Without an ISA you can currently earn up to £1000 in gains or £2000 in dividends. But you are aiming for long-term growth and the ISA will shelter it from income or capital gains tax.
4. You can transfer an existing ISA to a new provider, and you can switch money from a cash to a Stocks and Shares ISA (and the other way around if you sell down your investments).
5. Charges can chip away at your returns. Be sure to understand what you are paying and why.
   The only other rule is: for best results, get started!

“My ISA plan is going to let me retire early”

Richard Broderick is 34 and earns £55,000 a year working in finance. He and his partner have pre-school age children, and he began investing five years ago.

Richard says: “I have a medium to high risk appetite because of my long-term investment horizon. I want to retire early at age 60 – or at least have the choice of doing this – and plan to fund it and supplement my pensions income. I expect that my investments will need to help fund my retirement for 20 years as the current average UK life expectancy for men is around 80.”

His top tip? “Write down your goals and what the point of this is to you. Then when the markets dip, look at this to remind yourself not to panic. Understand this is a long process but that ultimately time has proven it to be a successful way to build financial independence.”

“My ISA gives me peace of mind”

Suzanne Bearne is 39 and is a freelance journalist and media consultant. She started putting £50 a month into a Stocks and Shares ISA six years ago and would put in extra chunks of money when she could.

She says: “I think I reached a point when I was saving for a deposit for my home that I thought actually, instead of my money sitting in a low-interest rate account, why don't I start investing and see that money potentially grow? The pandemic gave me more time to sit and research investments and also investigate setting up a pension. As a result, I threw a good few thousand into my Stocks and Shares ISA last year.”

Her top tip? “More of us are interested in sustainability but there's a lot of ‘greenwashing’ going on, so I'd advise anyone interested in investing in sustainable companies to really do their homework to find out if that's really where you want your money to go.”

Ready to start saving? From cash ISAs to Stocks and Shares ISAs, we’ve got it covered.

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