How to switch to a stocks and shares ISA

Top tips on keep­ing your tax-free al­lowance and get­ting a bet­ter re­turn on your money

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SOME CASH ISAS WILL CHARGE A PENALTY WHEN YOU CLOSE YOUR AC­COUNT

If you’re fed up with the low in­ter­est rates of­fered by cash ISAs it could be time to switch to a stocks and shares ISA.

Trans­fer­ring your money cor­rectly will en­sure your tax-free al­lowance re­mains in­tact.

WHY SWITCH TO STOCKS AND SHARES?

In­ter­est rates are ex­tremely low which means the an­nual re­turns avail­able on cash ISAs are very poor. The high­est rate we could find was just over 2% for a fiveyear fixed rate ISA. This is lower than the cur­rent in­fla­tion rate of 2.9%, which means your money will ac­tu­ally drop in value in real terms over time.

In­vest­ing in shares of­fers you with a much greater chance of grow­ing your money at a de­cent rate. The Bar­clays Eq­uity Gilt Study shows that over the last 50 years – once the im­pact of in­fla­tion is stripped out – stocks and shares have de­liv­ered an an­nual re­turn of 5.7% com­pared with a just 1.5% from cash.

HOW DO I TRANS­FER MY MONEY?

You can trans­fer from a cash ISA to a stocks and shares ISA at any time. But it’s ex­tremely im­por­tant that you ar­range the trans­fer through your new ISA provider.

If you with­draw the money, close your ac­count and then rein­vest the cash into an­other ISA, the newly de­posited money will count against your £20,000 an­nual ISA al­lowance. If this takes you over your al­lowance, your sav­ings could lose their tax-free sta­tus.

You sim­ply need to fill in a trans­fer form with your new provider, giv­ing them your per­sonal de­tails and cash ISA ac­count num­ber.

If your cur­rent cash ISA con­tains sav­ings paid in dur­ing the cur­rent tax year then you have to trans­fer the whole ac­count to your new provider. If the sav­ings are from pre­vi­ous tax years, you can make a par­tial or whole trans­fer.

Some cash ISAs will charge a penalty when you close your ac­count. This is usu­ally the case

if you opted for a fixed rate ISA and you’re clos­ing the ac­count be­fore the term has ma­tured. You’ll need to weigh up whether the ben­e­fits of the stocks and shares ISA make it worth pay­ing the penalty.

It will usu­ally take about two weeks for a cash trans­fer to com­plete, after which you can start in­vest­ing.

CHOOS­ING A PROVIDER

There are lots of com­pa­nies of­fer­ing stocks and shares ISAs.

Rodolfo Cre­spo, se­nior an­a­lyst at Plat­fo­rum, a re­search com­pany which spe­cialises in in­vest­ment plat­forms, says the most im­por­tant fac­tors to con­sider are brand, price and an easy-to-use web­site.

He says more ex­pe­ri­enced in­vestors should look for a provider that of­fers straight­for­ward ac­cess to a wide range of in­vest­ment op­tions, in­clud­ing funds, in­vest­ment trusts, ex­change-traded funds (ETFs), shares and bonds.

Some plat­forms let you pick your own in­vest­ments and oth­ers of­fer ready-made port­fo­lios that they build and run them­selves.

Han­nah Purslow, spokesper­son at AJ Bell Youin­vest, says en­sur­ing the plat­form of­fers the ser­vices you need is also im­por­tant.

‘If you want to be able to man­age your in­vest­ments on the go make sure the ISA provider has a good mo­bile app for your phone. Re­search and tools may also be im­por­tant, par­tic­u­larly if you’re a less con­fi­dent in­vestor or new to in­vest­ing and want a help­ing hand. Good re­search can help guide and in­form your in­vest­ment de­ci­sions and

IF YOU’RE A LESS CON­FI­DENT IN­VESTOR OR ARE LOOK­ING FOR LOWER RISK YOU COULD CON­SIDER A MULTI-AS­SET FUND. THE CHARGES TEND TO BE HIGHER THAN REG­U­LAR FUNDS BUT THEY ARE AN EASY WAY OF DIVERSIFYI NG YOUR PORT­FO­LIO

some plat­forms of­fer on­line tools which can help to build and an­a­lyse your port­fo­lio,’ she ex­plains.

En­sur­ing you don’t pay ex­ces­sive charges is cru­cial be­cause fees can eat into your re­turns over the long term. Charges to look out for in­clude ad­min­is­tra­tion fees, trad­ing fees and in­vest­ment cus­tody fees.

‘Price needs to be con­sid­ered in re­la­tion to the ser­vice lev­els and re­views of the plat­forms you’re vet­ting as cheap­est might not nec­es­sar­ily be best. The fo­cus should be on value for money,’ says Purslow.

START­ING TO IN­VEST

Once your stocks and shares ISA is up and run­ning you can be­gin choos­ing your in­vest­ments.

It’s a good idea to think about why you’re in­vest­ing and for how long. This will help you de­cide which as­sets could help you meet your in­vest­ment goals.

‘If you’re sav­ing for a house de­posit in the near fu­ture your ap­petite for risk will be lower – the last thing a house buyer needs is a sud­den fall in the stock mar­ket re­duc­ing their in­vest­ment right when they need to ac­cess the money,’ Purslow ex­plains.

If your in­vest­ment goal is long-term, for ex­am­ple sav­ing for re­tire­ment, you can af­ford to take on more risk.

If you’re a less con­fi­dent in­vestor or are look­ing for lower risk you could con­sider a mul­ti­as­set fund. The charges tend to be higher than reg­u­lar funds but they are an easy way of di­ver­si­fy­ing your port­fo­lio.

‘They of­fer ex­po­sure to a broader mix of as­set classes, sec­tors and re­gions while also spread­ing risk and of­fer­ing a stead­ier over­all re­turn than if you were to in­vest in in­di­vid­ual as­sets,’ Purslow says.

Pas­sive funds – track­ers or ETFs – are usu­ally cheaper than ac­tive funds and give a re­turn that mir­rors an in­dex. Ac­tive funds are more ex­pen­sive but there is the pos­si­bil­ity of the man­ager out­per­form­ing the in­dex.

If you don’t want to re­search, choose and mon­i­tor in­vest­ments your­self, why not see if your ISA provider of­fers their own funds as these are usu­ally risk-rated, so you can find one that matches your risk pro­file.

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