If you have never invested money in the markets and only ever kept your savings in an ordinary account or cash Isa, then investing for the first time can seem daunting.
Luckily, there is plenty of free help available to make sure that opening and running your first stocks and shares Isa goes smoothly.
Most people like to put their money in cash accounts because it means their funds will never go down and are guaranteed to grow every year. Do not expect stellar returns, though. Cash Isa rates are at a record low, paying a paltry 0.66% on average, excluding any temporary bonuses, according to the Bank of England. To get a better return, you must take more risk and invest in shares, which, as the disclaimer always points out, “can go down as well as up”.
Recent stock market volatility may put you off. According to the personal finance website Moneyfacts, the value of the average stocks and shares Isa fell 2.7% in the tax year that ended last Tuesday.
In the longer term, however, the statistics speak for themselves. Since 1899, investing in the stock market over any period of 18 years beat cash 99% of the time, according to the Barclays Equity Gilt Study 2016.
So, just five days into the new tax year, why not be an early bird and take the plunge? Here’s our beginner’s guide to opening a stocks and shares Isa.
You may already have a cash Isa with a bank or building society, but you can also have a stocks and shares version. The combined amount — excluding growth or interest payments — in your cash and/or stocks and shares Isa for the year may not exceed the £15,240 allowance for 2016-17.
A range of investments can be held in a stocks and shares Isa, including funds that invest in the stock market, property and bonds, and individual shares, bonds and government bonds (known as gilts).
By holding your investments in an Isa, any income or dividends you receive or growth in the value of your investments will be free of tax. This will continue to be the case for as long as you leave the money in its tax-free wrapper.
For example, the Isa limit will rise to £20,000 next April. If you were to use up all of this year’s Isa allowance and next year’s too, you would have a total of £35,240 sheltered from the taxman — plus whatever interest, dividends or growth you have accrued.
Take the example of one very lucky woman whose £15,240 investment turns into £30,000 this tax year. The whole thing is tax-free — and she can invest a full £20,000 in 2017-18 too.
Isas do not “die” every year. As long as you keep the money within the tax-free wrapper, it remains exactly that — tax-free.
Where should I open the Isa?
You can open a stocks and shares Isa with your bank or building society but beware: they tend to put your money into poor funds and impose high charges. See Ian Cowie’s article, above, for more on this.
A plethora of specialist investment platforms are available from which to choose . Larger ones, such as Hargreaves Lansdown and Fidelity, have lots of free information on their websites. Other low-cost platforms include Cavendish Online, IWeb and — for larger sums — Alliance Trust Savings.
How much are the fees?
Hargreaves Lansdown charges 0.45% a year on investments worth up to £250,000. Invest between £250,000 and £1m and you pay 0.25%, dropping to zero if you have more than £2m invested.
Fidelity charges a flat £45 if you hold less than £7,500, but 0.35% if you have between £7,500 and £249,999. If you invest £250,000 or more, the charge for your entire holding is 0.2% a year.
Unfortunately, the charges do not end there. You will also have to pay the fees levied by each fund held within the Isa. Some funds are cheaper than others. For example, if you have £50,000 in an Isa with Hargreaves Lansdown and invest in a fund charging 0.75% a year, your total cost over the year would be 1.2% a year for that fund (0.45% + 0.75%).
Lower charges apply if you opt for a tracker fund, which uses computers to follow a particular stock market index, such as the FTSE 100.
Bear in mind that investment platforms usually charge a fee each time you want to buy or sell shares. If you buy individual shares there is also stamp duty, levied at 0.5%.
How do I know which investments to pick?
You should diversify your investment across different regions and asset classes, which means investing in companies from different parts of the world as well as different assets — for example, property, bonds and shares. The idea is that if one region or asset falls, others may rise, thereby reducing the volatility of your overall portfolio.
Both Hargreaves Lansdown and Fidelity have lists — the Wealth 150 and Select lists respectively — of funds they recommend based on their analysis of fund managers’ performance in recent years . These are free to view.
Trustnet.com and morningstar.com also provide free details about funds, their performances and where they rank compared with their peers.
What if I want someone else to do the hard work?
You can use a financial adviser or “discretionary” manager to look after your Isa. The former can also provide advice on other aspects of financial planning, such as inheritance tax. A discretionary manager will take over your investments and make the decisions for you, and is typically more expensive than using a financial adviser.
Find an adviser near you at unbiased.co.uk or read reviews of local advisers at vouchedfor.co.uk.
Justin Modray of Candid Financial Advice said: “Taking advice is unlikely to be economic on sums below £100,000, and above this many advisers charge excessive fees, so it’s vital to shop around for a fair deal.”
Nutmeg offers a lower-cost discretionary service by operating online and only investing in tracker funds. Its annual charge for the Isa ranges from 0.95%, if you have only £500 to invest, to 0.3% , if you are investing more than £1m. Tracker fund fees are in addition and likely to add 0.2% or more a year.