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
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.