Should I invest in a stocks and shares ISA?

Gareth Shaw / 08 January 2016 ( 22 February 2017 )

Stocks and shares ISAs offer more potential for growth than cash ISAs, but there are things you should consider before investing.



Question

I’m thinking of opening a stocks and shares ISA, rather than a cash ISA, this year – which factors should I be taking into account?

Answer

Interest rates have been at record lows for more than six years. So, if you’ve got savings in a cash ISA, it’s become tougher to grow your money or generate an income. 

That’s why many people are now seeking better returns using a stocks and shares ISA.

These accounts – also called ‘investment ISAs’ – differ from cash ISAs. Your money is invested in various stocks, shares or other types of investments, such as bonds, and held in a tax-efficient ‘wrapper’ – the technical term for the account. 

This means any income you generate is free from any further income tax, and any profits you make when you sell your investments are paid free of capital gains tax.

Unlike cash ISAs, which pay either fixed or variable interest, the amount of growth you get on savings held in an investment/stocks and shares ISA depends on the performance of the investments you buy.

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Are you ready to invest?

Before you go ahead and open a stocks and shares ISA, you need to make sure you’re ready to invest. All investments carry a risk that you could lose money, so you should only ever invest what you can afford to be without. 

That also means keeping some cash safe, in case things go wrong. 

A good rule is to put aside cash for six to 12 months’ living expenses.

How to choose an ISA

Will you need access to your cash?

And if you need quick access to your money, a cash ISA may be better. We suggest you open a stocks and shares ISA only if you intend to invest for at least five years. That’s because the longer you invest, the less your return will be affected by the swings of the market.

But if you’re comfortable with the risks and rules of investing, a stocks and shares ISA can give your money a great chance to grow. Investing on the stock market has the potential to generate far better returns than cash over the long term.

What is investment risk?

Now, that doesn’t mean all stocks and shares ISAs will give you the same returns. It all depends on the investments you choose to put them in, and the amount of risk they pose – the greater the risk, the greater the potential profit, but this comes with a higher potential for losses. 

Some stocks and shares ISAs also charge high fees, which can eat away at your returns, so you should keep a watchful eye on these. 

But as with everything in life, cheapest isn’t always best. It’s whether you’re getting value for money and the growth you’re looking for.

Will you need support?

Some of these stocks and shares ISAs are aimed at experienced investors and don’t come with any support. Others are more suited to those just starting out, and these come with lots of help and guidance. 

There are also options for people who don’t want to worry about making any big investment decisions themselves, with ISA investments designed to generate an income without the need for them to manage their money actively.

Saga offers a great Investment ISA, which you can either manage on your own or have looked after for you. So do check it out.

Next article: Read Annie Shaw's guide to common investment mistakes >>>

Are you aged 50 or over and considering share dealing to help fund your retirement? Saga Share Direct, provided by Equiniti Financial Services Limited, allows you to buy and sell a range of UK shares and funds with competitive pricing and no annual account management fees. Some investment types may have their own fees.

Shares are high‐risk investments. Share prices and the income from them can fall as well as rise and you may not get back the full amount invested. Saga Share Direct does not offer advice. If you are unsure whether this service is suitable for you, please consult a financial adviser.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.