Always fancied a Isa but too afraid It’s just four steps
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 (see page 103), 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.
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 Nutmeg, 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 platforms 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