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Stocks & Shares ISAs: Pros & Cons
Advantages - Stocks & Shares ISAs
  • The potential of better returns - A Cash ISA, depending on interest rates will earn on average anywhere from 1% - 6% a year. But a Stocks & Shares ISA can theoretically earn far more if the stockmarket rises considerably. Gains of 10%-20% a year are achievable assuming the right investments are bought

  • Lower tax on dividends - Dividends are paid tax-free minus 10% which is deducted by the issuer - See how dividends are taxed in ISAs

  • Capital Gains are 100% tax-free - This might not be so much of an advantage if your ISA portfolio is worth less than £10,000. But it's a great advantage if you want to hold shares and increase your ISA amount over the long-term.

  • Diversification - It's not just shares that can be held in a Stocks & Shares ISA, but also bonds, unit trusts etc. You can therefore use them to diversify your money into different asset classes

  • Flexibility - You are in control of where, when and how to invest

  • Tax-free income when retired - Many people use their yearly ISA allowance to invest in shares over multiple years and then when retired or near to retirement sell the shares and buy income producing assets such as income funds. The result of this can be a substantial tax-free income in retirement

  • New £11,520 total Stocks & Shares ISA limit
Disadvantages - Stocks & Shares ISAs
  • Your investments can fall in value - Obviously there can be no guarantee that stocks or stockmarket related investments will rise, they could fall, and fall dramatically

  • Stockmarket volatility - Many people can't handle the value of their investments continually moving up and down in value especially when the markets get volatile. Can you for example handle your shares rising or falling 20% over a week?

  • Charges and fees - If you don't watch the costs of all the associated charges, fees and commissions they can mount up. So much so that you might find that a significant chunk of your investment gains are eroded away by these repeated charges. Don't discount the role that fees play when running an investment account. The best investors always look to minimise charges at every available opportunity - See how to find the best Stocks & Shares ISA provider

  • Investments need to be checked - You don't have to keep an eye on a Cash ISA because the value of the cash doesn't go down and interest is paid every year. This is not the case with a Stocks & Shares ISA as the value of the investments is always moving. You will always need to be aware of whether some shares need to be sold and others purchased

  • Limited flexibility on some ISAs accounts - This can occur when you open an ISA account with some brokers or fund management companies. For example, they will only let you buy their funds and not allow you access to the whole market - stay clear of these because ISAs are about flexibility, and you want all the investment choices and not just some - See how to find the best Stocks & Shares ISA provider

  • Low interest paid on cash balances - It's possible to hold cash in a Stocks & Shares ISA but the interest rate is usually low. They might only pay 0.25% even if official rates are 2%.

  • Are they so tax-efficient - Everyone has a Capital Gains Tax (CGT) allowance of around £10,000 per year and most people never get anywhere near using this. Therefore one argument against Stocks & Shares ISAs is that unless you build up significant assets over time they are not worth it as your profits are unlikely be more than £10k in any one tax-year

  • Losses cannot be offset - A subtle point to recognise is that if you buy shares and place them in a Stocks & Shares ISA any losses generated cannot be offset again capital gains made on investments held outside the ISA. Think hard about this point and how much you're planning to invest in ISAs over the years. If this is just a small amount every other year you're probably better buying the investments outside the ISA wrapper
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