When stashing your money away into an ISA you have two basic choices as to what type of investment you want your money to go into: a Cash ISA or a Stocks and Shares ISA. The following article looks at what benefits may be on offer for those looking to put some or all of their money into the latter.
The most immediate attraction of a Stocks and Shares ISA above its cash equivalent is the fact that you can subscribe your entire allowance for the tax year, twice the level you are able to place into a Cash ISA. The current subscription limit for a SSISA in the 2012/13 tax year therefore is £11,280 as opposed to £5,640 for the cash element. Theoretically, the more you can invest the greater the possible yields (and losses) that may come your way. There are, however, a few other attractions of putting you ISA allowance into an SSISA.
Most investments available in an SSISA are ultimately based upon company shares and, although past performance is no guarantee of future performance, as any good advisor will always remind you, the long term performance of shares has consistently out-done cash throughout the last few decades. The past indications have suggested therefore that investing in shares will reward those who persist, despite the fact that they may be more volatile and vulnerable to short term losses.
What’s more, SSISAs give you a flexibility in your approach to financial choices that cash investments may not. The key to dealing with any investments is to understand the twin ideas of risk and reward; generally, the greater the potential profit to made on an investment, the greater the risk of making no profit and even a loss. This dynamic is reflected in the natural successes and failure of companies whose shares you may purchase as well as the structure of investment vehicles which are founded upon these.
The ranges of investments that can be available through an SSISA provide the opportunity to vary the risk vs reward ratio that you go for. If you want to invest directly into shares, for example, you could plump for a share portfolio, and use you own expertise to pick your investments, or a discretionary portfolio, where you entrust those decisions to an Investment Manager who will act according to the risk/yield remit you give him. Alternatively, you can have the option of pooling some of your money into collective investments such as investment trusts, unit trusts or OIECs (Open Ended Investment Companies) where you choose fund based upon certain themes (industrial sectors, geographical sectors) which each reflecting a particular risk/yield profile.
In regard to collective investments, fund managers will be using their expertise to ensure that the fund performs as well as possible, despite the problems that the stock markets have had in the last few years. There are always sectors (industrial or geographical etc) that are doing well in any financial climate and so there are always gains to be made for investors. It could be considered for example that investing in the energy sector will still be profitable in the next few years even if sectors such as banking may be less so. For those who are looking for extra security on their investments however, there are also fixed term options, such as bonds (essentially lending money to corporations or the government), where you sacrifice the fact that your money is inaccessible for a set period in exchange for the guaranteed return of your capital investment at the end of that period, together with the promise of a set interest payment.
The returns that a SSISA generates can, depending on the type of investment involved, take the form of cash income (e.g., dividends on shares, income on funds) or be reflected in the growth of that investment (e.g., increase in share price, increased allocation of units in unit trust) which can be realised when the investment is sold. As a very approximate guide, it can be estimated by looking at some of the SSISAs on the market now for example, that well performing funds can yield between 3.5 - 7% cash income into your ISA. This is in contrast to interest rates of around 4% for the better paying Cash ISAs, which in turn are usually heavily restricted in terms of access to the money put into them, as well as being affected by the low Bank of England base rate which is set to remain unchanged for the next couple of years at least.
The recommended approach is ultimately to construct a balanced portfolio of investments taking into account both risk and reward. The options available to investors will vary depending on the ISA provider and so it is important to take this into consideration when weighing up your choices. Anyone investing in a Stocks and Shares ISA though should always seek financial advice before embarking on any complex investments and remember that, unlike some cash investments, they will need to be managed actively to ensure maximum returns.
© Stuart Mitchell 2012
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