Many people are familiar with the “Cash ISA”, which is similar in many ways to a regular savings account. However, what about other ISA types – particularly the Stocks & Shares ISA? How can an individual build a strong portfolio using this tax-efficient “vehicle?”
Below, our Teesside financial planners offer a short guide to investing using an ISA. We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser here in Cumbria:
t: 01228 210 137`
e: [email protected]
What is a Stocks & Shares ISA?
A Stocks & Shares ISA allows an individual to invest in a wide range of investment “types” – e.g. shares and bonds. Any money that is earned from investments within the ISA is free from UK taxes. In 2023-24, you can contribute up to £20,000 to your Stocks & Shares ISA and receive tax-free capital gains, dividends, and interest.
The recent Spring Budget made some important changes to ISAs which should be noted. Firstly, for many years an investor has only been allowed to open one of each type of ISA in a single tax year. For instance, you are limited to opening one Stocks & Shares ISA in 2023-24.
However, from 6 April 2024 the new rules from the Autumn Statement will come into effect. At this point, an individual could open as many accounts as they like with different providers. This opens up more possibilities for “shopping around” for the best ISA deals.
Secondly, Chancellor Jeremy Hunt has unveiled plans for a new type of ISA – the “British ISA” in his Spring Budget (2024). Details are still coming in about this new measure. Yet the initial proposal is to allow an individual to “extend” their £20,000 annual ISA allowance by a further £5,000 if they invest in British shares.
The results of the government’s consultation are expected in June 2024. At this point, we should all know more about the British ISA.
Using a Stocks & Shares ISA strategically
An investor should consider two key questions at this point. Firstly, how much should I contribute to my ISAs in this tax year (and how should I “spread out” my contributions)? Secondly, how should I allocate those contributions across different ISA types?
The first question will depend partly on your financial means. Not all people will be able to maximise their £20,000 ISA allowance each year. However, if you plan on saving or investing anything (outside of a pension), then it is worth considering using your ISA allowance due to the tax benefits mentioned above.
The answer to the second question also depends on your goals and circumstances. For instance, if your “emergency fund” is running low (i.e. you have less than 3 months’ of living costs in easy-access savings), then a Cash ISA may be a higher priority as you build your savings back up. However, if you are looking at investing for the long-term, with the potential for inflation-beating returns, then a Stocks & Shares ISA could be a useful tool.
Here, it can help to use your ISA allowance in partnership with your other tax allowances to ensure you maximise your tax-free returns. For instance, in 2023-24 an individual can generate up to £6,000 in capital gains outside of an ISA without facing capital gains tax (CGT). If an individual holds investments outside of their ISA or pensions, then it can make sense to sell some assets that have made a gain and contribute the proceeds into their ISA allowance.
Investment principles and the Stocks & Shares ISA
The principles for investing via an ISA are similar to the broad time-honoured principles of investing as a whole. For instance, ensuring an appropriate level of diversification in your ISA investments is very important.
By “spreading out” your risk across multiple companies, markets, and countries, you can mitigate the risks associated with each one. For example, if one of your companies or funds fall in value, the better performance of the others can help to buttress your portfolio.
Consider your risk tolerance. How much volatility are you prepared to experience? Here, a financial adviser can help you accurately determine your “risk profile” by asking the right questions. For instance, if your Stocks & Shares ISA suddenly fell by 20% overnight, how would you react? The answer may help to guide which investment strategy you wish to follow.
A financial adviser can also assist with examining different funds and investment options to ensure that your selection rests upon strong “fundamentals” (e.g. fair value or strong growth potential). This helps to narrow down your options to a set of “vetted candidates“ when building a portfolio, helping to reduce “choice paralysis” as an investor.
Finally, consider getting professional advice to help you monitor your Stocks & Shares ISA investments and make appropriate adjustments in light of your long-term goals and strategy. For instance, if your ISA portfolio is starting to go “off balance” due to varying investment performance (e.g. of your shares versus bonds), a financial adviser can assist with the rebalancing process – i.e. discerning which investments to buy and sell, and when.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.