If you’re looking for a simple, tax-efficient way to grow your money on the financial markets, a stocks and shares ISA is probably for you. Yet, with a number of different options available, how do you know which is best? Here are five things to look out for when finding the right ISA.
It might seem like the ISA landscape is complex due to the number of options available, but the good news is that it’s really quite simple. ISAs are essentially just savings or investment accounts that allow you to grow your money tax-free.
Normally you’d be required to pay tax on any profit you make above your annual capital gains tax allowance when you sell your investments, and on any income you earn above the dividend allowance. If you put it in an ISA, you don’t have to pay a thing.
What types of ISAs are there?
The different types of ISAs available include the cash ISA, stocks and shares ISA, Lifetime ISA, and Innovative Finance ISA. Each play their part in reliable financial planning.
You can invest up to £20,000 each year into your stocks and shares ISA, although you can spread your allowance between different types if you wish.
If you’re fed up with the returns available on savings accounts due to the low interest rate environment, you might want to grow your money on the financial markets. You should have paid off any expensive debt, have three months of outgoings saved up in case of an emergency, and have a longer time-horizon before you start investing, however.
Due to the fundamental dynamics of the financial markets, you need to be able to take on some risk if you want to grow your money for the future. If you’re looking to grow your money for something in the next two years, you’ll want to protect the value of your money so you can reach your goals. Your portfolio will naturally be more risk-averse, which limits the scope for return.
Time can be your best friend when investing, many people hunt for that elusive edge that will help them reach their goals, the ‘holy grail’. All you really need is time, this allows you to take on those riskier investments in the hope for bigger returns and means you can ride out any short-term fluctuations.
Below are the five things you should look for in an ISA.
1. Investment advice
Stocks and shares ISAs are often DIY vehicles, which means you’re required to manage your investments yourself. You have the flexibility to choose what goes into your portfolio, but you have the responsibility of planning your investment strategy, outlining your asset allocation, and researching the investments that best reflect you to go into your portfolio.
Many people like this freedom, but for those who are too busy to manage their investments by themselves, or lack the financial confidence to be in charge of the family finances, investment advice can help people make better decisions with their money.
Making the right decisions for your financial situation means you’re more likely to reach your financial goals, whatever they may be, and lead a better quality of life.
Innovation in the financial services sector means that people can now access investment advice at the touch of a button and at a fraction of the price of the traditional industry. It can also be delivered anywhere and at any time, whether on your daily commute, over a glass of wine once the kids are in bed, or over brunch at the weekend.
Investment advice helps people invest in a way that’s right for them. Understanding your financial background, appetite for risk and nature of your financial goals means you can build your investment portfolio in the best way to achieve these.
At Moneyfarm, our world-class technology means we provide cost-effective investment advice and ongoing suitability tests to ensure you’re investments continue to put you in the best position to reach your goals for as long as you invest with us.
2. Discretionary fund management
Once you know what your stocks and shares ISA portfolio should look like in terms of asset allocation, how do you decide which investments to go in it?
Once you’ve got your portfolio set up, do you have the time and discipline to manage your portfolio to ensure you’re on the right track? You can invest up to £20,000 in your ISA each year, so you’ll want to know you’re investing in the best place for your goals.
Many people love the thrill and responsibility of managing their investments themselves, but others just don’t have the time, skill or knowledge to do their financial future justice.
That’s why many prefer the experts to do it for them, so they can focus on the important things in life, knowing a team of professionals have their best interests at heart.
At Moneyfarm, our investment strategy is built around our strategic asset allocation, which takes a 10-year view on market trends. Whilst we can forecast where we’re going to be in a decade, we know the route there might not be smooth, so we complement our strategic strategy with a tactical overlay to take advantage of any new opportunities that arise along the way.
Our asset allocation team monitor the markets daily, and meet with the Investment Committee every two weeks to discuss common themes and trends. This results in portfolio adjustments around three-five times a year.
3. Don’t let fees eat into your return
Traditionally, having an expert manage your money for you has come at a big cost. The more you pay in fees, the more your investments have to grow for you to breakeven, and then grow even further to make a profit.
It doesn’t help that pricing structures have also traditionally been convoluted, with many investors unaware of how much they’re actually paying in fees. All investors should be able to access cost-effective investment advice and discretionary fund management to help them reach their financial goals.
Thanks to changes in the regulatory landscape, wealth managers now have to adopt Moneyfarm’s philosophy of transparency and simplicity, although look out for exit fees as these still aren’t clear on many platforms. When you invest with Moneyfarm, you’re charged just two fees, a management fee and an ETF fee.
The management fee is calculated on a sliding scale depending on how much you have invested, and the ETF fee is an average 0.3% – we could go cheaper, but we would sacrifice on geographical diversification, which we think is a crucial risk management tool to building portfolios.
4. Free transfers
Whether you’ve built up a small fortune in a cash ISA or have a number of different stocks and shares ISAs cumulated up over the years, many investors like to transfer their ISA into one place to benefit from cheaper fees and manage their investments more easily.
When you want to move your money from one ISA provider – whether a bank, asset manager or investment platform – to another, it’s important you transfer your money correctly. You don’t want to take your money out of your ISA wrapper because you will lose your tax-free benefits you’ve accrued over the years.
ISA transfers have become simple and hassle-free for investors looking to make their money work harder for them, but it’s important you understand whether you’ll be charged anything to move providers as this could impact your decision.
Costs like transfer fees, whether hidden or not, can eat into an investor’s return. At Moneyfarm, we believe investors should be able to transfer in and out for free – and you can. One of our founding philosophies was to be transparent over costs, too, which is why we don’t have any hidden charges.
5. Regular investing
When you’ve got a lump-sum to invest, you’ll want to get it working harder for you as soon as possible, but it’s important you supplement this with a regular investment to your ISA.
In addition to increasing the amount you have invested in your ISA, it also averages out the amount you spend for an investment over time, potentially lowering it during times of volatility.
That means you could end up paying less for an asset, which means it will be that bit easier to make a profit.
Regular investment plans are a great way to benefit from pound cost averaging, but make sure you know how much setting up and running a regular investment plan will cost you. At Moneyfarm it doesn’t cost a thing to deposit money in your account or set-up a standing order.
This means you keep more of your money invested in the market, which can help you benefit from compound interest – where your earnings are reinvested to earn their own return. Albert Einstein called this the eighth wonder of the world, and it can make a real difference over the long run.