Stocks & Shares ISA (Individual Savings Accounts) Explained

ISA, of course stands for "Individual Savings Account" and adults have a total investment allowance of up to £10,200 annually, which can be invested in full in a stocks and shares ISA or divided equally between a stocks and shares ISA and a cash ISA.

A stocks and shares ISA, as the name suggests allows investment into the stock market – in fact, into any fund managed in the United Kingdom, or any company listed on a "recognised" stock exchange, such as those in London, or New York – instead of a savings account. A stocks and shares ISA can include individual shares, or bonds, or collective investments, such as unit, or investment trusts or OEICs ("Open Ended Investment Companies").

Stocks and Shares ISA Features, Benefits & Considerations

Investment into the stock market inevitably involves a degree of volatility, and it is almost impossible to predict how the market will move up or down in the short term. Even in the longer term, over 5 years or 10 years, the past performance of a stock and shares ISA may not be indicative of future returns, but investing for a longer period may produce higher returns – higher than, say a cash ISA over the same period – because there is sufficient time to compensate for fluctuations in the market. You can however, choose the level of risk that you are prepared to accept – to a certain degree at least – by investing solely in blue chip companies, in the UK for example, but this is obviously reflected in the level of potential gains or losses.

It may also be possible – in theory, at least – to invest in a stock and shares ISA when assets are valued cheaply, in relation to your expectation of their value in the future, but there are no guarantees. Ultimately the performance of a stocks and shares ISA is dependent on the performance of the market; you may receive a handsome return on your investment, but you may, equally, lose money, so you should consider carefully the level of risk involved, and your comfort with that risk, before you invest.

Taxation of a stocks and shares ISA works slightly differently from that of a cash ISA (which is, in fact, completely tax-free). Investment in shares, or collective or mutual funds through an ISA can produce tax savings if you pay higher rate income tax or capital gains tax, but not otherwise. Basic rate taxpayers normally pay 10% tax on dividend income for example, and this payment is not refundable within an ISA. Interest accrued on investments, such as corporate bonds, for example, is tax-free.

Initial, and annual, charges for stocks and shares ISAs usually compare favourably with other non-ISA investment structures, and may be taken as commission, or a fee payable to an IFA ("Independent Financial Advisor") or similar individual. Stocks and shares ISAs are managed by banks, building societies, stockbrokers, financial advisors, etc., but if you are in any doubt with regard to the legitimacy of any individual, or company the FSA ("Financial Services Authority") does maintain a list of authorised stocks and shares ISA managers.