A stocks and shares ISA is an investment account with a tax-efficient wrapper. It lets you invest money in funds, shares, bonds, and other assets, and any gains or income generated inside the ISA are free from UK Capital Gains Tax and Income Tax. You can put up to twenty thousand pounds per year into ISAs in total — split however you like between a cash ISA, stocks and shares ISA, Lifetime ISA, and Innovative Finance ISA.
How it differs from a cash ISA
A cash ISA holds money in the way a savings account does, earning interest at a fixed or variable rate. A stocks and shares ISA holds investments — most commonly funds that spread your money across dozens or hundreds of companies. The key difference is risk and potential return. Cash ISAs carry no investment risk but their returns are limited by interest rates. Stocks and shares ISAs carry the risk that your investments can fall in value, but historically over longer periods they have tended to grow faster than cash.
The role of time horizon
Stocks and shares ISAs are generally considered appropriate for money you will not need for at least five years, and ideally longer. Investment values fluctuate in the short term — a bad year in the market can see a portfolio fall by twenty percent or more. Over longer periods, markets have historically recovered and grown, which is why time in the market matters more than timing the market for most investors. If you need the money in the next two or three years, a savings account is almost always more appropriate.
What you can invest in
Most people who open a stocks and shares ISA invest in funds rather than individual shares. A fund pools money from many investors and holds a diversified basket of assets. Index funds — which track a market index like the FTSE 100 or the global MSCI World index — are particularly popular because of their low costs and broad diversification. Many platforms designed for newer investors offer a small selection of ready-made portfolios at different risk levels, which reduces the complexity for people who do not want to choose individual funds.
Charges matter more than most people realise
Every ISA platform charges fees, and every fund has its own ongoing charge. These compound over time, which means a seemingly small difference in annual charges has a significant effect on long-term returns. A platform charging one percent per year and a fund with an ongoing charge of one percent means your money needs to grow by two percent before you are ahead. Comparing platform fees before opening an account — the SIPP and ISA comparison tools on Monevator are a good starting point — is worth the thirty minutes it takes.
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Ask Fin provides general guidance only, not regulated financial or investment advice. The value of investments can go down as well as up and you may get back less than you put in. Always consider your own circumstances and if in doubt speak with a regulated financial adviser.