Cash Isas are by far the nation’s favourite type of Individual Savings Account – over three times more savers pay into one every year than the number of people paying into stocks and shares Isas.
But while cash Isas are a great introduction to tax-free saving they only get you so far. With inflation at 5.5 per cent a year and the top rates at no more than 1.9 per cent, you are guaranteed to see the value of your money eroded.
To stand any chance of protecting or growing wealth, savers must consider stocks and shares Isas.
Best foot forward: To stand any chance of protecting or growing wealth, savers must consider stocks and shares Isas
The two have similarities. As with cash Isas, all returns made inside a stocks and shares Isa are tax-free, money can be put it or taken out easily, and a maximum of £20,000 can be saved in one every tax year.
The key difference is that while money in a cash Isa is held in a savings account earning interest, money in a stocks and shares Isa is invested in shares, funds or investment trusts, and earns investment returns rather than interest. Although shifting from cash to stocks and shares can be rewarding, it takes a change in mindset. Cash Isa savers enjoy the comfort of knowing precisely what is in their account from day to day – it is determined by what they put in and the interest rate they are earning.
In contrast, the value of a stocks and shares Isa fluctuates from hour to hour. This volatility means there is no point in investing in one if you think you might need to withdraw your funds within five years.
If that volatility – and the possibility that you could lose more than you gain – makes you uncomfortable, then stick with cash.
1. PIck the perfect ISA provider for you
First, you need to decide which stocks and shares Isa provider to go for. There are many, each catering to a different type of investor.
Some offer ready-made portfolios. With these you simply decide how much risk you are comfortable with, and how many years you have to invest, and the Isa provider will recommend a portfolio to fit this profile.
The more risk, the higher chance of stellar returns, but also of losing money if the stock market takes a turn for the worse.
Providers offering these readymade portfolios are often called robo-advisers – the likes of Nut – meg, Wealthify and Moneyfarm. Most high street banks also provide this type of service.
They can be ideal if you’re just starting out and don’t want to make too many decisions.
Other Isa providers allow you to choose your own investments. This can be a good option if you are interested in investing and want to build your own portfolio of funds.
Among the most popular are Hargreaves Lansdown, AJ Bell, Interactive Investor and Fidelity.
Pick a provider that will suit your needs not just now but also over the next few years as your investing progresses.
2. Check how much you will be paying in fees
It is vital to keep a lid on charges, which come in an array of forms. You will pay fees to the investment platform through which you hold your Isa, as well as charges to hold particular funds.
These are in addition to other costs, for example for buying and selling funds and shares.
Compare fees on different plat – forms before you pick one, as structures vary. Some charge a flat fee regardless of how much you hold in an Isa, others charge a percentage of the sum you hold. Which one is right for you will depend on how much you invest.
Also compare how platforms rank for customer service. If you need help or something goes wrong, you want to know your provider will be on hand with support and answers.
For an excellent summary of the major providers, their fee structures and what they offer, log on to thisismoney.co.uk/platform, provided by our sister publication This is Money.
3. Start slowly with small sums
If you fill your stocks and shares Isa with a range of investments, from all over the world and in a variety of business sectors, you are less exposed if the fortunes of one country or one type of investment go belly up.
If you are ready to dip your toe into the water, but not to jump in head – first, you could consider investing a small sum every month. That way, you don’t risk putting a large lump sum into the stock market just before a downturn – you’ll be investing through the good times and the bad.
Furthermore, you can always put money into both a cash and a stocks and shares Isa in the same tax year.
However, you cannot put money into more than one of each type of Isa and the total cannot be greater than £20,000.
4. Build an Isa around trusts and funds
With thousands of funds, investment trusts and stocks to choose from, it can be hard to know where to start.
If you need a steer, most stocks and shares Isa providers have a best-buy list of their recommended funds.
There is no guarantee these will perform better than others, but they do offer the reassurance that experts have trawled over them in hours of due diligence.
Here are a few ideas that may suit both those who are just starting out, as well as the more seasoned Isa investor.
Fidelity Index World
Working out which sectors and regions are likely to perform well is hard, even when the economy is motoring along smoothly. But in this era of uncertainty, it’s tougher than usual. So rather than picking between them, why not buy the lot?
A global tracker fund allows you to invest in thousands of companies all around the globe. They are also low-cost so you minimise the risk of your returns being eaten up by fees.
Fidelity Index World fund is one. For just 0.12 per cent a year, you get access to a small slice of thousands of companies.
Your returns essentially mirror the average performance of stock markets all across the world.
Beware that with global tracker funds you may have a bigger exposure to tech companies than you realise.
For instance, the top five holdings of Fidelity Index World are Apple, Microsoft, Google’s parent company Alphabet, Amazon and Facebook-owner Meta. The fund has generated returns over the past three years of 46 per cent and 11 per cent over the past year.
City of London
Past performance is never a guarantee of future returns. Nonetheless, there is something reassuring about putting money in an investment company that has been around for more than a century.
Investment trust City of London was launched in 1891 and has raised its annual dividend every year since 1966.
It invests in large UK companies such as British American Tobacco, Diageo and Tesco.
It pays an annual dividend income of about 5 per cent and has an annual charge of 0.38 per cent. The trust has produced returns over the past three years of 12 per cent and 10 per cent over the past year.
Vanguard LifeStrategy 40% Equity
Some investors want to reduce risk with a fund holding assets other than shares. Vanguard’s LifeStrategy funds offer a mix of bonds and shares under one bonnet.
Bonds are a more defensive asset than equities, providing a regular income and less price volatility. In its five funds, equity exposure ranges from 20 to 100 per cent. You pick the ratio of shares to bonds to suit your appetite for risk.
Over the past three years, the fund with 40 per cent exposure to equity has produced a return of 16 per cent.
In the past year, it has trodden water, generating a return of 0.4 per cent. Annual charges are 0.22 per cent.
BlackRock Continental European
This fund invests at least 70 per cent of its assets in large companies listed on European stock exchanges.
It is the only fund listed on four of the five best-buy lists of the biggest Isa platforms.
It has an annual charge of 0.93 per cent. Over the past three years, it has delivered a return of 56 per cent, and 3 per cent in the past year.
F&C
Like City of London, F&C has been around since time immemorial – 1868. It’s the oldest investment trust listed on the UK stock market.
Its name doesn’t give much away, but it is a global fund with assets valued at £4.2billion and is managed by BMPO Global Asset Management.
The trust’s attributes include an annual charge of just 0.52 per cent and 48 consecutive years of dividend increases. Although more than half of its assets are in the US it has key holdings in all major markets. Diversification lies at its core.
It will never shoot the lights out when it comes to performance.
However, over the past one and five years, returns are 3 and 47 per cent respectively.
A super foundation stone for any Isa investment portfolio.
