How can you actually invest your ISA?

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While cash ISAs continue to offer lower returns than inflation, you could consider using your allowance in a stocks and shares ISA instead. Here's how to get started.

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Investment ISAs put your capital at risk, and you may get back less than you originally invested.

Individual savings accounts (ISAs) let you save and invest up to a certain amount of money every tax year without paying tax on your returns. 

There are four main types available to UK adults:

In the current tax year you can save up to £20,000 into ISAs of any type, although you can only put money into one of each type of ISA at a time (with a maximum of £4,000 into a lifetime ISA). You might choose to put £10,000 into a cash ISA and £10,000 into a stocks and shares ISA, for example, or the whole £20,000 into one type.

Make the most of your tax-free ISA allowance.

What is an investment ISA?

An investment ISA is usually known as a stocks and shares ISA. You make investments within it using part or all of your annual ISA allowance so you don’t have to pay tax on any money you make.

Although they can give you higher returns than cash ISAs they are riskier because the value of your investments can go down as well as up.

You can compare stocks and shares ISAs here. 

How do stocks and shares ISAs differ from cash ISAs?

A cash ISA is a deposit-based savings account you put some or all of your allowance into to earn interest tax-free.

Your money is saved at the bank or building society where your cash ISA is held and isn't used to invest in funds or companies.

You can get various types of cash ISA, from instant access to bonds that tie your money up for a number of years.

Compare our best cash ISAs

How to invest in a stocks and shares ISA

You can use your stocks and shares ISA to invest in:

  • Shares

  • Bonds – effectively, loans to companies or the government 

  • Funds – where your money is pooled with that of other investors and invested in a range of shares, bonds or other assets by the fund manager

Exactly what you should invest in depends on your attitude to risk but you should always have a mix of investments to spread the risk. That way, if one type of investment falls there’s the chance another will rise to offset any losses.

You can take out a stocks and shares ISA directly with a provider, such as a bank or building society, through a financial adviser or through an online platform, also known as a fund supermarket, which is generally the cheapest option.

If you’re taking out a stocks and shares ISA directly with a provider you may only be able to invest in one fund, choose from a number of different funds or invest in ready-made portfolios. 

You can open a stocks and shares ISA with a lump sum or by setting up a regular investment each month or both. There are usually minimum amounts you can invest, depending on the ISA. 

You can also transfer from one stocks and shares ISA to another but you may have to pay transfer-out fees.

Make money in the the stock market tax free with a stocks and shares ISA

Stocks and shares ISA fees

All stocks and shares ISAs have charges, which can eat into your returns, so you should take these into account when choosing, and pick a fee structure that best suits your needs and what you plan to invest in. 

If you’re using an online platform you’ll pay a fee to the platform for using it, which could be a flat fee or a percentage of the value of your investments depending on the size of your portfolio. Percentage fees are usually cheaper for smaller portfolios. 

You’ll also pay trading charges for buying and selling shares and funds, although you may get some for free each month. If you plan to buy and sell investments often you should look for a platform with low trading charges.

Plus, you’ll pay fees for the investments themselves, such as annual management charges for funds. 

Actively managed funds, where a fund manager uses their knowledge to choose what the fund invests in, generally have higher fees than passive ones, which track a particular stock market index, such as the FTSE 100.

Stocks and shares vs cash
How the value of £1,000 invested in different things has fared over the past 10 years.

Source: Defaqto

Savings accounts data based on average notice accounts interest of 3.07%.

Do-it-yourself versus robo-adviser platforms

Some platforms let you choose your investments yourself while others do it for you by matching you to a ready-made investment portfolio according to how much risk you are prepared to take and your goals. These are known as robo-advisers.

Although do-it-yourself (DIY) platforms tend to be the cheapest option, they are best suited to confident investors as you’ll need to do your research and make all your investment decisions yourself. These include AJ Bell Youinvest, Vanguard, Hargreaves Lansdown and Interactive Investor.

A robo-adviser platform could suit you if you don’t want to make your own decisions about where to invest your money. They are likely to cost more than DIY platforms but are cheaper than getting advice from an independent financial adviser. Examples of these are Nutmeg and Wealthify.

What happens when you invest?

Your money buys units in whichever funds you have chosen or that the platform has selected on your behalf.

The number of units you get in a particular fund will depend on how much each unit is worth at the time you invest. For example:

  • If one month you invest £50, you’ll buy as many units as £50 gets you at the unit price. If the value of the units increases in the future, you will have made a profit on them.

  • If the next month the unit price has increased, your investment will buy fewer units. If the unit price drops the following month, those units will have fallen in value.

Whether you choose to invest a lump sum or a monthly amount, the value of your investments can go up and down often, so only invest what you can afford to lose.

Learn more about how stocks and shares ISAs work.

Should you invest?

Investing is not something you should consider if you want a quick return on your money.

It is typically used if you want to get the best chance of returns over a term of five years or more, as stock market prices do go up and down frequently.

Whether you choose to invest in funds you’ve chosen yourself, or through a platform that selects them on your behalf, make sure you understand the risks.

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