3 reasons to invest in a Stocks and Shares ISA
An Individual Savings Account (ISA) is an efficient way of saving due to the fact that you receive tax-free capital gains, interest and dividend payments. Here are 3 reasons why you should consider investing in a Stocks & Shares ISA.
An Individual Savings Account (ISA) is an efficient way of saving due to the fact that you receive tax-free capital gains, interest and dividend payments. There are various types of ISAs, however, most people in the UK hold either a Stocks & Shares ISA or a Cash ISA.
According to the HMRC, in the 2023/24 tax year, 66% of the 15 million ISA accounts in the UK were held in cash, but the popularity of the Stocks & Shares ISA is increasing.
The main difference between a Stocks & Shares ISA and a Cash ISA is the way in which you hold your wealth.
- Cash ISAs offer a high degree of flexibility but may have a lower rate of returns.
- Stocks & Shares ISAs offer higher returns but carry the risk of losing money.
So why did around 280,000 more people subscribe to a Stocks and Shares ISA in 2023/24 than the tax year before? Here are just 3 reasons why people are turning to a Stocks & Shares ISA as a great way to help realise long-term financial goals.
1. It can help minimise the impact of inflation on your savings
Inflation is currently above the 2% target set by the Bank of England. Perhaps the most obvious effect of inflation is that it erodes the purchasing power of our money. With the prices of goods and services consistently increasing, it’s clear that money loses its value. And when the value of our money decreases whilst our incomes remain the same, our standard of living can reduce rapidly.
This means that your bank account may not be the best place for your money. There are two reasons why people tend to save less when inflation is high. First, as the cost of living increases, there is less spare cash to put away for a rainy day, and second, even if money is put into a savings account, it’s essentially losing value over time.
Of course, the benefit of cash savings is that you can generally access them whenever you need to. It’s sensible to have enough savings to cover any short-term needs, but keeping too much of your savings in cash could cost you.
With a Stocks & Shares ISA you invest your money in the stock market instead of holding it in cash. This can mean that it has the potential to grow faster than sitting in a bank account. It’s important to point out, however, that while investing your money can result in bigger returns compared to a savings account, it does come with an element of risk. As with any kind of investing, there is a chance that you could lose money and get back less than you put in.
2. It’s a tax-efficient way to save
The key benefit of investing through an ISA is that there is no tax to pay on any dividends, growth, interest or income you receive from the investments.
There is no limit to the number of ISAs that you can hold. You can still save up to £20,000 each tax year across your ISAs, but from 6 April 2027, new rules will change how much of this allowance can be placed into a Cash ISA. For savers under age 65, the maximum you can contribute to Cash ISAs will be capped at £12,000, with the remainder of your £20,000 allowance still available for Stocks & Shares ISAs, Innovative Finance ISAs and (if eligible) Lifetime ISAs. Savers aged 65 and over will continue to be able to put up to the full £20,000 into Cash ISAs.
These changes only apply to new contributions from April 2027 onwards; existing Cash ISA savings will not be affected. Transfers from Stocks & Shares or Innovative Finance ISAs into Cash ISAs will no longer be permitted for those under 65, to prevent circumvention of the new limit.
You can still split your overall ISA allowance across different ISA types as best suits your goals, for example, holding part in a Cash ISA for more flexibility and part in a Stocks & Shares ISA for potential growth, within the relevant limits for your age group.
3. It’s easy to start investing through a Stocks and Shares ISA
If you have never invested before, then a Stocks & Shares ISA is a great place to start. How you invest is up to you. You can either invest a lump sum or make regular contributions – whichever works best for your financial circumstances.
And if you’re finding it difficult choosing between opening a Cash ISA or a Stocks & Shares ISA, remember that you can have one of each. We’d recommend that you speak to a financial adviser who can help you choose the right ISA(s) most appropriate to your financial circumstances.
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The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.
There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.
Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Cash savings and investments are protected to the value of £120,000 and £85,000 respectively, per person per institution by the Financial Services Compensation Scheme (FSCS). However, the value of investments may fall as well as rise.
