Five reasons to open a stocks and shares ISA

Whatever you’re putting money aside for, there’s likely to be a role for Individual Saving Accounts, or ISAs, which are home to roughly £750 billion of the UK’s non-pension savings (HMRC, June 2023).

If you’re looking to grow your money over many years, perhaps to fund a dream purchase or help you in retirement, then it might be worth considering a stocks and shares ISA.

Investing in the stockmarkets through a stocks and shares ISA might offer you exposure to higher returns than cash alone can deliver, if you're able to accept some level of risk.

The value of your investments can go down as well as up so you might not get back the amount you put in.

Here are five reasons why you might consider investing some, or more, of your savings in a stocks and shares ISA, which could help you realise your long-term (10 years or more) financial ambitions. The current allowance for ISAs is £20,000 in total across the ISA types you invest in.

1. Inflation can be the enemy of cash savings

When the price of goods and services, or inflation, is rising faster than the rate of interest you receive on, say, your cash savings in a UK bank or building society, the ‘real’ value of the amount is eroded which could leave you worse off. It’s sensible to keep enough cash to cover any short-term needs, but keeping too much of your savings in cash can carry a cost.

By accepting an increased level of risk and investing your money in assets such as company shares, bonds and property, you could potentially achieve higher returns than cash alone can offer. Returns from investing can never be guaranteed, and the value of your investments can go down as well as up so you might not get back the amount you put in.

2. Diversify your assets

Relying on any one asset could expose you to an unnecessary risk of losing money. The key to managing risk over the long run is holding the right blend of assets that can collectively perform in different circumstances. This is called diversification.

A wide range of investments can be held in a stocks and shares ISA. As well as individual company shares and bonds – both government and corporate – you can also invest in funds that package several assets. Some funds focus on one type of asset, and sometimes even one region, while others hold a mix of assets from around the world. A broad and diversified portfolio should help spread the risk of individual assets failing to deliver returns or falling in value.

3. Protect your investments from tax

The beauty of investing through an ISA is any income you receive, and any capital gains from a rise in value of your investments, will be free from personal taxation, irrespective of any other earnings you have.

It’s important to remember that ISA tax rules may change in the future. The tax advantages of investing through an ISA will also depend on your personal circumstances.

4. ISA portfolios can be flexible

Professional fund managers are constantly preparing for and reacting to changing market conditions, adjusting their portfolios accordingly. Your circumstances – and attitude towards investment risks – are also likely to evolve, meaning different types of assets will become more or less appropriate over time.

For example, if you’re close to retirement you may want to reduce the level of risk in your portfolio, or move towards income-generating assets. It’s sensible to review your investments regularly – even as a long-term investor.

Within an ISA, you can reallocate your portfolio, for example by switching between funds, according to your outlook and needs at any time without losing any of the tax benefits. You can also move money from your cash ISA to your stocks and shares ISA, or vice versa, as your short-term cash needs change.

5. Investing might be easier than you think

Investing in stocks and shares through an ISA could hardly be more straightforward. You can choose to invest a lump sum or set up a regular savings plan that fits your circumstances and your financial goals.

You’ll quickly find that there are lots of different approaches to investing, each with their own risk and return profiles. It’s important that you only invest in products that are suitable for you. Before dipping your toes in the market, you should consider whether you need financial advice to help you establish an investment approach that is right for you. Visit our ‘Get financial advice’ page to help find an adviser.

The views expressed here should not be taken as a recommendation, advice or forecast. We’re unable to give financial advice. If you’re unsure about the suitability of your investment, speak to your financial adviser.