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Want to swap your cash Isa for stocks and shares?

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Written by: Andrew Craig
03/04/2018
For those wanting to dip a toe into the stock market with their Isa savings, we ask Andrew Craig of Plain English Finance what they need to know.

There’s a lot about investors depositing regularly into investments, but for those wanting to use their full £20,000 allowance on a stocks and shares Isa before the end of the tax year, what should they do?

AC: “Don’t forget that just because you transfer £20,000 into a stocks and shares ISA, it doesn’t mean you have to invest it immediately. Many people don’t realise that with many ISA providers, you can leave any money you transfer as cash if you wish and invest it whenever you like in whatever you like at some point in the future. The better ISA providers also have regular investment facilities such that you can transfer money into an ISA account in time for the deadline and then instruct them to make regular monthly payments either from now on or from some point in future into a large choice of funds or stock market-listed investments such as shares or ETFs.

If people are unsure of what to invest in but want to make use of £20,000 before the end of the tax year, what would you suggest?

AC: “I would suggest putting money into a fund (within a stocks & shares ISA) that gives you the option of investing in markets all across the globe and across a mix of assets, otherwise known as a global multi-asset fund. If you are diversified by geography and by asset you have a good chance of making consistent returns, while protecting against falls in any one particular market (such as the UK or US stock market). This approach means that your money is spread across lots of different types of investments in various markets across the world. I call this ‘owning the world’ and it is an approach with a multi-century track record, used by many of the wealthiest people in the world.

For those who have existing ISA cash, can they transfer this whole amount to an investment platform?

If you have money in an existing cash ISA and you want to transfer this money into a stocks & shares ISA, you can do so. In fact, I would argue that this is a good idea given how poor the real returns are on cash ISAs. Over time, investment has a very high chance of doing a great deal better than cash.

Can they have other ISAs if say they don’t want to commit the full £20,000 to an investment ISA?

There are four different types of ISAs available to savers: 1) Cash ISA; 2) stocks and shares ISA; 3) innovative finance ISA; 4)Lifetime ISA. Savers can put their £20,000 annual allowance into one type of ISA or spread their money across the range of ISAs. The exception to the rule is the Lifetime ISA where the limit is £4,000. Lifetime ISAs were launched in April 2017 to help people save for their first home or retirement. One example of how to save a lump sum of £20,000 could be to save £16,000 in a stocks & shares ISA, and £4,000 in a Lifetime ISA if you can afford it and qualify for a Lifetime ISA.

For those who are cautious about investing for the first time, what would you tell them?

To make real progress financially, you must invest, rather than just save.  Spreading your money across different assets and different regions globally makes doing this less risky than most people realise. One complaint I hear from potential investors is, ‘investing in the stock market is just like gambling’, and ‘I could lose all my money if the market crashes’. It’s true to say that stock markets crash, however, crashes come and go and, historically, markets spend a great deal more time trending up than down. By ‘owning the world’ through investing in a global multi-asset fund, however, your money, and your risk, is spread so that if the markets fall in one part of the globe or in one kind of asset, chances are they’ll be riding high elsewhere. As an example, from March 2007 to March 2009, stock markets around the world halved or worse but in 2008, oil hit an all time high and in 2009, gold was up nearly 20%. Too few people take advantage of this reality and it isn’t that difficult to do if you know how.

If you decide to put your £20,000 lump sum into a cash ISA or basic savings account, your money is in real danger of losing value or, at best, simply treading water. Cash ISAs and simple savings accounts will pay, at best, around 3% interest currently. Given that inflation (RPI) is at 2.7%, savers in a cash ISA or savings account really won’t see any financial gains for their trouble.

What do people need to know about charges/fees? All returns are tax free?

Fees will depend on which ISA provider you use but, in my view, are a small price to pay to benefit from the tax and potential investment benefits of having money in a stocks and shares ISA. All returns are tax free.

Are deadlines any stricter than cash ISAs? Can it be done online?

The deadlines are the same no matter which ISA you use. It is easy and can be done online or with a few easy phone calls.

What do they need to know about re-investing returns or taking profit from an investment ISA?

Re-investing your returns helps with a phenomenon known as ‘compounding’, or in the words of Albert Einstein, “the eighth wonder of the world!”. Compounding is a form of free money. Imagine that your £20,000 went up by 10% in one year. Your £20,000 would now be £22,000 – your original lump sum plus £2,000 interest, or ‘profit’. Rather than take your £2,000 profit, you could re-invest it. So, now you’re investing £22,000. If you then achieved 10% again your £22,000 would grow to £24,200.

An easy way to do this is to ensure you set your account to ‘accumulation’, which means that all of your investments automatically reinvest any income made each year.

 

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