ISAs - a good way to start investing?

The tax benefits of an ISA

The first thing to realise about ISAs is that they protect your money from tax. With a regular cash savings account, interest is classed as income and you’re taxed on it accordingly. But in an ISA, it’s completely tax-free.

This is worth bearing in mind if you’re considering investment or savings options outside of an ISA. You may need to pay tax on what you make.

Most interest or investment income is taxed at your usual income tax rate, so counts towards your ‘Personal Savings Allowance’.

• For basic rate taxpayers, this personal savings allowance means you can earn £1,000 in interest or investment income before paying tax
• If you’re a higher rate taxpayer, that comes down to just £500
• If you’re an additional rate taxpayer, you won’t have a personal savings allowance at all. Interest or investment returns gained outside of an ISA will still be taxable

Investing in an ISA means you don’t have to worry about any of this – you can just focus on the potential for tax-free growth.

Tax treatment can depend on individual circumstances and may change in the future.

Cash vs stocks and shares ISAs

There are a number of different types of ISA. The most well-known are cash ISAs and stocks and shares ISAs. You can read more on the other types in this guide to ISAs.

Cash ISAs generate tax-free interest, while stocks and shares ISAs seek to generate higher returns through investing. Historically, investment ISAs have outperformed cash (though they do carry greater risk).

With ISAs being such a popular product wrapper, you may already be familiar with the basic ISA rules. You can contribute up to £20,000 per tax year (known as the ISA allowance), and you can spread that allowance across one of each type. From April 2024, you'll actually be able to pay into multiple ISAs of the same type in each tax year. 

This familiarity with how ISAs work could make a stocks and shares ISA a great way to start investing. If you already have a cash ISA, it could be a way of moving into investments within a wrapper you already know – and without having to give up the security of your cash ISA.

You could even choose to transfer cash ISA savings into a stocks and shares ISA, to give your investment a head start.

Stocks and shares made simpler

In a stocks and shares ISA, your contributions are typically used to buy stocks, shares or fund units.

Some stocks and shares ISAs will allow you to choose that mix of investments yourself – but for those new to investing, this can be a challenging place to start.

Other stocks and shares ISAs may offer you a simpler selection of risk-rated funds, which you can choose depending on your own appetite for risk. Other ISAs, like Wesleyan’s With Profits ISA, may invest your money in a single fund, already diversified on your behalf.

Investing in a managed fund like this is perhaps one of the simpler ways to start investing. You won’t need to worry about choosing shares or making trades, you can just let the fund managers do the work.

Just remember, with all kinds of stocks and shares ISAs, there will usually be management fees to pay. And like all investments, there’s an element of risk involved. 

The benefits of investing in funds

Diversification

Investing in funds typically involves diversifying your money across multiple assets, whereas investing in individual companies or commodities concentrates your investment in one area. By opting for a fund, you reduce the risk of significant impact from one falling share price.

To learn more, read our guide to diversification.

Affordability

In a fund, you’re effectively sharing the costs of investment with other people – which can help stretch the value of your money. Unlike buying and selling shares yourself, where there may be additional charges to pay, the fund’s dealings are all covered within the management charges.

Access to assets

These days, purchasing overseas shares is relatively straightforward. However, certain asset types remain far easier to access through a fund than if you were trying to buy them directly. As such, funds enable you to create a portfolio that might ordinarily be out of reach – for example, investing in multiple commercial properties.

Low maintenance

As a Fund Manager handles all of the research and trading on your behalf, all you need to do is follow the progress of the fund. It’s important to seek financial advice before doing so, to ensure your decision aligns with your financial goals.

Accessing your money

How do I withdraw money from a stocks and shares ISA?

You can take money out of an investment ISA just as you would from a cash ISA. Rarely are there any penalties for withdrawal, though there may be a minimum withdrawal amount.

It's worth bearing in mind though that taking money out of your stocks and shares ISA in the short term could stunt the growth of your investment. That's why it's usually best to only invest money you won't need access to for at least five years.

Willing to invest for a minimum of five years

Most stocks and shares ISAs aim to deliver growth over the medium to long-term, so it’s best for money you don’t need to access in the short-term.

This approach is based on the principle of spending time in the market, rather than timing the market. The goal is a higher return due to the length of time the investment is held and the associated compound growth (put simply, the increase in value of your investment over time).

If you're still unsure whether a stocks and shares ISA is the right choice for you, it may be best to seek tailored advice from a Specialist Financial Adviser from Wesleyan Financial Services.