It’s been nearly 20 years since the Stocks and Shares ISA was first introduced and yet many people still overlook this clever way to improve their personal finance.
What does it do?
Every adult in the UK is permitted to save £20,000 annually in a Stocks & Shares ISA. Unlike a Cash ISA, which is really just a tax-free savings account, a Stocks and Shares ISA makes your money work by investing in the stock market. You could buy shares in FTSE listed companies, invest in worldwide funds, or hold government bonds. Importantly, any capital gains you earn through buying or selling, as well as any dividends you receive, are all completely tax free. This means you could enhance your tax-free savings quite dramatically, far exceeding the percentage return offered by a bank.
How does it work?
1) Choose a provider.
Just as a Cash ISA requires a bank to host your savings account, you’ll need to select a platform (i.e., website) to host your Stocks & Shares Isa. Each one charges a monthly or yearly fee, so shop around to compare different rates.
2) Choose the investments to put in your ISA.
Many providers offer financial advice or even ready-made portfolios if you are unsure, but you are totally free to choose your own range of investments. For instance, you might put all your money in shares, all in funds, or mix them as you decide. Shares will have a buying/selling commission charge, while funds have their own individual manager rates, so again you’ll need to research the costs to see what works best for you.
Isn’t it risky?
Of course, the value of investments can go up or down. But taking a risk can also bring significant rewards – the FTSE 100 is up over 614% since inception in 1984, making it an excellent way to beat the money-sapping power of inflation. Historically, cash regularly invested in stocks has also beaten comparable gains from bank account interest rates or even rises in property value. For this reason, many financial advisers suggest investing for the long term (at least 5 years), ignoring the temporary ups and downs along the way.
If all this sounds interesting, remember you only have until the end of the current tax year to use your Stocks and Shares ISA allowance, as it can’t be rolled over to the next year. Use it or lose it!
Written by Matthew Scarsbrook
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