How a stocks and share ISA can introduce beginners to the market

Do you look at the balance of your savings account with an air of despair? Interest rates have been at rock bottom levels for quite some time now, delivering decidedly meager returns for savers. Yet the alte ative, to invest money in the markets to try to get returns at a level once delivered by savings, fills many people with dread. After all, you could lose money this way – an even worse prospect than the few pounds and pence you’re currently getting. There is, indeed, some evidence that the current generation of adults is even more nervous about dipping its toe into the market. It’s thought that just as people who grew up in the 30s were ‘depression babies’ and never trusted the markets in their lifetime, people who became adults in the recession which followed the banking crisis of 2008/9 are similarly wary of investing their hard earned cash. So, what’s the answer? Well, how about a product that bridges the divide? One which builds on your experience of savings and acts as a gateway into the world of investing? That’s where a stocks and shares ISA can come in. What is a stocks and shares ISA? This is what’s known as a ‘wrapper’ – a way of putting your money into a number of different investments in a tax-efficient way. So, instead of having your ISA money in cash, you’ll hold it as stocks and shares (you can combine both). In the current financial year – 2017/18 – you can put up to £20,000 into an ISA (up from £15,240 last year). That annual allowance can be split between cash and investments and also split between different types of investment, hence this being seen as a ‘wrapper’ around a number of funding streams. What are the benefits of stocks and shares ISAs? As this guide from Which? demonstrates, this ISA ensures you pay no tax on the dividends you receive, the capital gains or the interest. While it’s worth noting, as Which? does, that this might not be as generous as it sounds – with everyone having a separate allowance on dividends and capital gains – it’s still a perk on top of the fact that you’re potentially tapping into growth above the interest rates for cash savings. One of the beauties of this form of investment is that you can be either active or passive, depending on your experience and confidence. Passive funds just follow an index – with the value of your ISA linked to the performance of the FTSE 100, say. This is ideal for people who are beginners and are finding their feet with market investments. Active funds employ a manager and seek the best investments in a bid to beat the market and find better than average returns. There’s more risk here – but also chance for greater reward. If you’re confident that you can find the right manager to make the right choices, this can be a lucrative path to follow. Either way, you’ll be looking to more than a stagnant interest rate to get more from your money. You’ll pay a fee – both upfront and as an annual management charge – and can get these products from a bank or fund manager. It might not be for everyone, but the stocks and shares ISA certainly offers a way to upgrade your ISA investments and embrace the benefits of the markets as a beginner (while still keeping some of your allowance in cash if you wish).