Stocks and Shares ISA - Pros & Cons
Individual Savings Accounts with Higher Returns on Tax-Free Savings
Apr 2, 2009
A stocks and shares ISA is a form of tax-free savings offering investors higher returns. Stocks and shares Individual Savings Accounts have an annual limit of £7,200.
Individual Savings Accounts are a form of tax-free savings, particularly benefiting higher-rate tax payers. ISA's are broken down into two separate parts, cash ISA's and stocks and shares ISA's. From April 6th 2010, an investor to put up to £10,200 per annum into a stocks and shares ISA. The limit is currently £7,200 unless a saver is over-50.
The Advantages of the Stocks and Shares ISA
- Tax-free savings. It allows investors to enjoy tax-free savings. This means that higher-rate tax payers aren't burdened with a 40% rate of tax on any returns from their savings. They may also wish to utilise the ISA allowance of their partner.
- Higher returns. Although an Individual Savings Account with an equities element increases the risk to capital, it also allows investors to potentially enjoy higher returns. There are highly speculative emerging market funds to simple FTSE tracker ISA's available.
- Variety and choice. Savers can choose from a variety of funds for their stocks and shares ISA. Options range from higher return emerging markets funds to low charging FTSE tracker ISA's.
- ISA transfers. Should it perform poorly, an investor can perform an ISA transfer. The process is straight-forward and simply involves completing a few forms.
- Cash ISA's. Inland Revenue rules allow an investor to perform an transfer from a cash ISA to a stocks and shares ISA. It is not possible to do the opposite.
The Disadvantages of Stocks and Shares ISA
- Risk to capital. Although it provides investors with the opportunity to enjoy higher returns, there is also a greater risk of losing capital. However, it is possible to choose a capital-protected FTSE tracker ISA rather than an emergency markets fund.
- Access to funds. Those opting for one will need to invest for a minimum term of 3 to 5 years. Those seeking instant access to their saving won't benefit from higher returns, but may find a variable rate cash ISA more appropriate.
- Poor performance. There are a number of funds that have performed poorly for many years. It may be a sensible idea to consult an independent financial advisor who will be able to diversify an investor's portfolio to minimise risk and achieve higher returns.
- Complexity. The wide variety of funds could make investing in a stocks and shares ISA rather complex. It may be advisable to seek guidance from an Independent Financial Advisor (IFA) before proceeding.
- Management charges. An emerging markets fund incurs higher management charges as they require complex decision-making from a financial expert. Investors seeking to minimise management charges could opt for a passively managed fund, such as a FTSE tracker ISA. This simply involves buying shares proportionately in the FTSE 100 shares index.
A stocks and shares ISA is an excellent way of benefiting from higher returns on investment capital. Higher-rate tax payers, in particular, should seek to utilise their tax-free savings allowance each year. Individuals who need instant access to their money may wish to consider a cash ISA.
The copyright of the article Stocks and Shares ISA - Pros & Cons in Building Personal Savings is owned by Asa Ghaffar. Permission to republish Stocks and Shares ISA - Pros & Cons in print or online must be granted by the author in writing.
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