A practical guide to moving from a cash to stocks and shares ISA
With rising inflation amid a backdrop of low interest rates, savers are having to make their money work harder to generate a real return.
Many may be considering investing in a stocks and shares ISA.
According to data from Fidelity International, a move into stock market investing could pay off.
It found that if you had invested £15,000 into the FTSE All Share index between 31 December 2006 and 31 December 2016, you would now be left with £25,769.
If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with just £15,846.
“That’s a difference of nearly £10,000 – too big for any sensible saver to ignore,” says Tom Stevenson, investment director at Fidelity.
With the average cash ISA paying a measly 0.83%, it’s no wonder stocks and shares ISAs are experiencing a rise in demand. Hargreaves Lansdown, the country’s biggest broker, noted an 18% increase in customers switching from cash to its stocks and shares ISAs over 2016.
If you’re thinking about making the move, here are some top pieces of advice:
Is now a good time to move from cash to stocks and shares?
Cash ISA rates have been low for a long time so if you’re still invested in a cash ISA and need your savings to work harder, then you could consider transferring all, or some, of your money to a stocks and shares ISA.
However, it’s important to note that stocks and shares ISAs are riskier and there is the possibility that you could lose money.
Darius McDermott, managing director of Chelsea Financial Services, says the UK stock market is quite high at the moment and given the political and economic uncertainty, it is quite possible that the FTSE 100 is near its peak.
“I’m quite cautious in the outlook so would suggest cash ISA investors need to think carefully about where they invest their money if they do decide to transfer. Remember: just because it’s called a stocks and shares ISA, it doesn’t mean you are limited to investing in stocks and shares. You can invest in other assets and you can switch at a later date,” he says.
Danny Cox, chartered financial planner at Hargreaves Lansdown, says investing should always be for the long-term so if you’re happy to take that view, then now is always a good time. However, he says it’s important to keep back some cash for emergencies.
Cautious or new investors could put their money in an ISA cash park. Each year we’re given a new ISA allowance (for 2016/17, the allowance is £15,240 but from 6 April 2017, the amount will increase to £20,000). If you don’t use that allowance, it’s lost forever. If you can’t decide where to invest or you want more time to choose, an ISA cash park acts as a waiting room for your money. Generally you apply online and allocate the money for the cash park. Just remember to allocate the money into funds at some point otherwise you won’t be earning any return on that amount.
Should I transfer the whole sum or drip-feed amounts in?
If you’ve built up a large pot by using up some or all of the previous years’ allowances, you can transfer the full amount if you want to. All previous years’ ISA savings can be transferred no matter how big or small the total is and you can add to this amount if you haven’t already made a contribution this year.
Cox says you’ll never know the answer to the question of whether you should transfer the whole amount or drip-feed sums in without the benefit of hindsight. “Many people feel more comfortable drip-feeding money into their ISA and if this is the case then this is how they should invest. The longer you invest, the less difference the timing of a lump sum investment makes to your returns.”
If you don’t want to fully dive into a stocks and shares ISA, there is an option to hold one of each. Savers can only pay into one cash and one stocks and shares ISA in any one tax year.
McDermott says either option is fine but drip-feeding is good if you are unsure about the outlook for markets or if you really couldn’t stand to see your investment lose 10% immediately if the world markets take a knock.
“There is no right or wrong answer to this – each investor is different. But from a practical/time issue, it may be easier and result in a lot less admin to move it all at once though,” he says.
Are there any fees or charges I need to be aware of?
With cash ISAs there are no fees to pay, but if you’re in a fixed term ISA, check when the term ends or you could lose interest.
When it comes to stocks and shares ISAs, you’ll need to pay an annual fee to the fund manager if you buy a fund, a platform fee (for ‘holding’ and administering your ISA) and an adviser fee if you use one. If you invest in single stocks there may also be trading costs involved.
McDermott says: “You need to look at the charges of each ISA provider carefully as some have an ‘all-in’ fee, and others have a base fee with add-ons so they charge if you want to talk to them on the phone or receive information by post rather than email.”
How do I pick the right stocks and shares ISA?
You can choose active or passive funds across all the most popular sectors so there really is something for everyone. Most providers, such as Hargreaves Lansdown and Bestinvest, offer model portfolios which are ready made ISA portfolios managed by experts.
McDermott says that when you’re choosing a stocks and shares ISA, you need to consider what type of asset class you want to invest in, what fund within that asset class you want to invest in, and what platform is right for you.
“Remember, cheap isn’t always best. Think about value for money and potential returns. Never invest in anything you don’t really understand.”
How do I actually transfer from cash to stocks and shares?
Transferring your cash ISA to stocks and shares can take between two and five weeks. Once you’re happy with a provider, make sure you fill out a transfer form not a redemption form.
“This way you can transfer as much ‘old’ cash ISA money as you want – you are not limited to this year’s allowance,” says McDermott.
How often should I review my stocks and shares ISA?
Cox says most people review their ISAs annually or if circumstances change, but with online platforms it’s easy to see your ISA at any time. McDermott suggests reviewing your portfolio once or twice a year to make sure it is on track to reach your goals.
What looks good at the moment?
As he’s quite cautious at the moment, McDermott says he wouldn’t put a large amount of money into an equity fund.
“If you have a large amount of money to transfer, you could put it into a number of different funds in different asset classes, or pick a multi-asset fund. These funds invest in different asset classes but the fund manager decides how much to put into each. It is hard to identify an asset class that really stands out as being a great opportunity at the moment so I would say just make sure you are diversified.”
For cash ISA investors new to stocks and shares investing, he recommends more cautiously managed multi-asset funds like Jupiter Distribution or Henderson Cautious Managed. For those with a little more experience in riskier assets, he says you could consider the Schroder MM Diversity Tactical or F&C Navigator Distribution.