How to start your first stocks and shares ISA

Individual Savings Accounts, or ISAs as they are more commonly known, are potentially one of the first places that we look when starting to save. The ISA is simply a savings account that offers tax free growth or income, often referred to as a tax-free wrapper.

There are four types of ISA available: 

1. Cash ISA 
2. Stocks & Shares ISA or Investment ISA 
3. Innovative Finance ISA (IFISA)  
4. Lifetime ISAs (LISAs) 

The ISA allowance, which is the most an individual can save into an ISA each tax year, is currently £20,000. You can split your allowance across the different types of ISAs, for example saving £10,000 into a Stocks & Shares ISA and £10,000 into a cash ISA, which includes a maximum of £4,000 which can be contributed to a LISA. But it is important to note you can only pay into one of each type of ISA in a single tax year.

Starting your first stocks and shares ISA is not as daunting as it may initially sound. You don't need to be an experienced investor to start one and the composition of your portfolio can be as simple or as complex as you would like, depending on your needs and objectives. 

So where to begin? Below is a 'checklist' of the essential requirements you must satisfy to open your ISA:

• You must be over the age of 18
• You must be a UK resident for tax purposes 
• Or a Crown employee (e.g. diplomatic or overseas civil service) or their spouse or civil partner if you don't live in the UK
• You must not exceed the £20,000 ISA contribution allowance in the current tax year (cash, lifetime or other stocks and shares)

Providing all the above points are satisfied you can open your ISA. The primary considerations for you to think about at the beginning of this process are: your attitude to risk and risk tolerance when investing and the amount you are willing to invest, bearing in mind that this will be a medium to long term investment, so you do not want to rely on these funds in the short-term. 

Once you are happy with the amount you initially want to invest you can open an ISA in a few very simple steps.

Investment into a stocks and shares ISA can be in the form of new cash, a transfer from a cash ISA or transfer from an existing stocks and shares ISA. 

Selecting your investment approach is the one of the most important parts of your ISA as this is where you will delve into the world of stocks and shares. If you're a beginner, a multi-asset managed account may be a great place to start, they can help guide your investment decisions and minimise some of the risks associated with investing by offering you a well-diversified approach. The portfolios can be selected in line with the risk level you considered earlier, and profiles range from cautious to adventurous depending on your attitude to risk. 

Once invested in your selected portfolio, you’re all set up! It is important to note that markets change on a daily basis and although it is good to keep track of your investment performance, avoid checking it too often. This is because emotional investing can come into play and you might be tempted to move your funds on days when the market is down – remember, you are investing for the medium – long term – investing isn’t about timing the market but time in the market, as the old saying goes.

Here's some useful tips summarised for your ease:

1. Make sure to take the time to analyse your attitude to investment risk and only select a portfolio that you are comfortable with.
2. Refrain from checking your portfolio on a daily basis.
3. Be aware, this is a medium to long term investment and you do not need to be reactive to short term fluctuations in the markets.

What makes a Stocks & Shares ISA different:

Cash ISAs come with no fee, this is because they are cash accounts that you may get with a bank or building society as opposed to investment markets. Stocks & shares ISAs come with an array of fees and charges associated with trading and administration. They are comprised of:

• A platform charge – this is where your investment will be held. 
• An investment management charge – paid to the fund manager for actively managing your investments.
• A transaction cost – for the buying and selling of your investments.

Although generally speaking Stocks & Shares ISAs have the potential to produce higher returns than cash ISAs over the medium-long term, they come with a degree of risk. Your investments can rise and fall so you need to be comfortable with market movements and the potential of losses as well as gains. 

What can you invest in:

If you don’t know where to start, as mentioned earlier, selecting a pre-composed multi-asset portfolio is one potential approach to take. However, if you have more experience, another option available is for you to self-select your own funds, where you’ll have the ability to invest in a broad range of assets such as; equities (stocks & shares), property funds, bonds & gilts. You’ll also have the freedom to invest in different geographical regions across the World.  If you choose to do this you need to be confident with the risks associated with self-investing and ensure your investments are well diversified.  Researching your options in advance would be a prudent move. 

Tax Implications: 

Growth from your investments and withdrawals from the capital in your Stocks & Shares ISAs are completely tax-free.

ISA's are an important tax wrapper to utilise since general investment accounts (an alternative investment vehicle) are subject to capital gains tax, of which the annual allowance has reduced this tax year and will reduce again in the next tax year (£6,000 as of 2023/24 and £3,000 as of 2024/25).

The ISA allowance:

Most importantly, as mentioned above, the current ISA allowance for this tax year is £20,000. This means you can invest a maximum of £20,000 into all of your ISAs in this tax year. For example, if you have a Lifetime ISA you can invest £4,000 but this then means you only have £16,000 remaining allowance to invest in your Stock & Shares, Cash or any of your other ISA holdings. 

The tax year runs from the 6th April in a year to the 5th April the following year, this means every 6th April your ISA allowance will renew, and you can invest a further £20,000 into your ISAs (subject to changes in allowances). 

Important points to consider:

Before opening your ISA, ensure you retain enough money in cash as an emergency fund, this means you will not be relying on your ISA money in the event that you need access at short notice.

You can access your ISA money whenever you need to. Once invested these funds are not ‘locked away’. If your financial goals or circumstances change, you may want to consider adjusting the risk level in your portfolio rather than immediately taking your money out. 

If you do not feel confident about making your own investment decisions it may be worth seeking professional financial advice, although this does, of course, come with associated costs.

Please note: This article is intended as information only and does not constitute individual advice.  If advice is required, please ensure this is sought prior to taking any action or inaction. The information is based upon our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. The value of investments can go down as well as up, you may not get back what you originally invested. The FCA does not regulate tax advice.