Easy Guide to the Pros and Cons of Stocks and Shares ISAs
If you play your cards right, investing in Stocks and Shares ISAs will not only allow you to take advantage of the yearly tax-free allowance which currently stands at £10 680, you will also be able to earn substantial profits.
Nevertheless, the risks of Stocks and Shares ISAs are greater than their Cash ISA counterparts, and you’ll need to be vigilant about the ups and downs of the stock market to ensure you don’t lose out.
The following guide will explore the pros and cons of investing in a Stocks and Shares ISA, so you can better decide whether it will be a good financial choice for your particular needs.
Benefits
Better Investment Returns
With a Cash ISA, you can expect to earn on average of 1% – 6% a year, depending of course on the prevailing interest rates. Stocks and Shares ISA’s in comparison can potentially earn you superior gains, assuming you choose the right investments. These days there are a number of websites that can give you top investment tips, such as Redhot Penny Shares.
Diversification
Stocks and Shares ISAs are a great way to spread your eggs in more than one basket so that your risks are evened out. In addition to shares, you can also add bonds, unit trusts and more to your ISA portfolio, so that you have investments in different asset classes.
Tax-Free Capital Gains
Having zero tax on your Capital Gains is especially beneficial if you plan to hold shares and grow your ISA portfolio over the long term.
Flexibility
These types of ISA’s allow you to invest and manage your money exactly the way you choose – ideally, you should be able to decide on the where when and how to suit your needs.
Lower Dividend Tax
Your dividend earnings will be tax-free, apart from the 10% deduction on the part of the issuer.
Tax-Free Retirement Income
Stocks and Shares ISAs can also be used as an effective retirement investment – though buying shares over many years, you can then sell them as your retirement approaches to buy assets such as income funds – these would provide a tidy tax-free income in your golden years.
Disadvantages
Stock Market Ups and Downs
Local and global markets can be highly volatile, meaning your investments could potentially take a substantial dive if there’s a sudden downturn. In addition, many people’s finances are unsuited to weathering the pendulum swings that go part and parcel with playing the stock market.
In contrast to Cash ISAs which aren’t subject to fluctuations in value, you’ll need to keep a careful eye on the investments within your Stocks and Shares ISA portfolio so that you know when to buy and sell shares to compliment the state of the stock market. If you’re inexperienced in such things, it’s a good idea to consider an Independent Financial Advisor, who will have the experience and know-how to keep your investments from becoming a liability.
Related Fees
There can be a wide range of related charges, fees and commissions when running an investment account. To make sure you don’t fall short, it’s important to choose your Stocks and Shares ISA provider carefully, plus ensure they explain all the associated costs thoroughly.
Limited Fund Access
While the flexibility of Stocks and Shares ISAs is listed above as a benefit, be careful when choosing a provider as some brokers or fund management companies will lock you into particular funds rather than giving you open access to the whole market. The rule of thumb to maximise a Stocks and Shares ISA is to have total flexibility to make the investment choices that suit you.
Conclusion
By making wise investments within a Stocks and Shares ISA, you can both save money through your annual tax-free allowance and earn significant gains. All in all, this form of financial vehicle will be suitable to you if you plan to build your portfolio over the long term, if you’re vigilant about fluctuating market trends and if you’re clear about the amount of investment risk your circumstances allow for.
About the Author: George Pardew is an independent author on Stocks and Shares ISA’s.
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