There are many reasons why you may be looking to accumulate a sum of money by investing. Perhaps you are hoping to fund your child’s university fees or plan for the trip of a lifetime.
Whatever the reason, if you’re looking to save over a period of five years or more, you might want to consider a Stocks and Shares ISA to help you realise your long-term financial goals.
What is a Stocks and Shares ISA?
An ISA, or Individual Savings Account, is a tax-efficient way to save and invest your money.
In each tax year, everyone over the age of 18 can pay into any type of ISA up to the annual allowance, which is currently £20,000 for the 2019/20 tax year ending on 5 April 2020.
You don’t pay Income Tax or Capital Gains Tax on the interest or returns your money makes.
There are different kinds of Individual Savings Accounts. A Stocks and Shares ISA is very different to a Cash ISA, which is simply a savings account you never pay tax on.
With a Stocks and Shares ISA you are investing. If this is something which you are not familiar with, you would benefit from taking independent professional financial advice to gain a better understanding of what is involved, including the risks, as investments can go down as well as up.
Before getting a Stocks and Shares ISA
There are some things you should consider before you begin saving towards your goal. You should:
- Pay off any existing debts outside of a mortgage. The interest rate on credit and store cards may exceed any returns you achieve by saving, certainly in the short term.
- Have an emergency fund. Life tends to throw unexpected curve balls. Savings you can access quickly will help cover any unforeseeable expenses that may occur.
Cash vs a Stocks and Shares ISA
One of the appeals of cash savings is that you can access them when you want. Your interest is also generally fixed, so the value won’t go up and down like share prices can.
Although it’s sensible to keep enough cash to cover any short-term needs, having too much of your savings in cash can carry a cost.
For example, when the price of goods and services, or inflation, is rising faster than the rate of interest you receive on your cash savings in a UK bank or building society, the ‘real’ value of the amount is eroded, which could leave you worse off.
By accepting some level of calculated risk and investing your money in assets such as company shares, bonds and property, you could potentially achieve higher returns than cash alone can offer.
Returns from investing can never be guaranteed, however, and you should remember that past record is no guide to future performance.
Investing in a Stocks and Shares ISA could save you a significant amount of tax. When you invest in this way, any income you receive, and any capital gains from a rise in value of your investments, will be free from personal taxation, irrespective of any other earnings you have.
It’s important to remember that ISA tax rules may change in the future. The tax advantages of investing through an ISA will also depend on your personal circumstances.
Relying on any one asset could expose you to an unnecessary risk of losing money.
The key to managing risk over the long term is holding the right blend of assets that can collectively perform in different circumstances.
There is the option to hold a wide range of investments in a Stocks and Shares ISA. As well as individual company shares and bonds – both government and corporate – you can also invest in funds that feature several assets.
Some funds focus on one type of asset, and sometimes even one region, while others hold a mix of assets from around the world. A broad and diversified portfolio will help spread the risk of individual assets failing to deliver returns or falling in value.
Your circumstances and attitude towards investment risks are likely to evolve, meaning different types of assets will become more, or less, appropriate over time.
If you are using ISAs as part of your retirement planning, when you approach the end of your working life you may want to reduce the level of risk in your portfolio or move towards income-generating assets.
Within an ISA, you can reallocate your portfolio according to your outlook and needs at any time without losing any of the tax benefits. You can also move money from your Cash ISA to your Stocks and Shares ISA, or vice versa, as your short-term cash needs change.
We’re here to help
It’s sensible to assess your investments regularly – even as a long-term investor.
Inflation can have a corrosive effect on the money that you’ve set aside for your future. Rather than rising in value, as you might hope, your savings could be slowly diminishing.
If you would like help reviewing your portfolio, please get in touch. We look forward to hearing from you.
THE VALUE OF YOUR INVESTMENTS CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU ORIGINALLY INVESTED.