Best and cheapest investment ISAs for beginners
Beginners guide to Stocks & Shares ISAs
This article is a simple jargon-free guide to Stocks and Shares ISA. In this article you will learn how Stocks and Shares ISAs work and even how to get started and what to invest in. I suggest you read the full article to make sure you don't miss anything however you can jump to relevant sections using the hyperlinks below:
- Beginners guide to Stocks & Shares ISAs
- What is a Stocks and Shares ISA?
- How do investment ISAs work
- Investment ISA limits
- Investment ISA charges
- Transferring ISAs
- Where should you invest your ISA allowance?
- Best Stocks and Shares ISA for beginners
- Cheapest Stocks and Shares ISA
- Best performing Stocks and Shares ISA
What is a Stocks and Shares ISA?
Think of a Stocks and Shares ISA like a box that you can put investments in. Any investment or asset that you put into this box can grow and/or produce income tax-free (with one or two small exceptions). Anything you take out of the box is also tax-free. Stocks and Shares ISAs exist because the Government wants to encourage you to save and invest for the future or for your retirement. However, they put an annual limit on how much money you can pay into a Stocks and Shares ISA which I cover in the section titled Investment ISA limits.
You can invest in a whole range of assets via an investment ISA such as:
- cash (this is known as a cash ISA)
- funds (including unit trusts, investment trusts and exchange traded funds (etfs))
Funds are collective investments which pool the money from millions of investors in order to benefit from the economies of scale. So a fund may, for example, invest in UK company shares. The fund is run by a computer or a fund manager in accordance with a stated investment mandate. By choosing to invest your money in a fund you share in the profits (and losses) the fund makes. You can invest in any number of the 2,000 or more funds that are out there, which cover a range of asset types, to produce the best Stocks and Shares ISA portfolio. The key is to hold funds covering a wide range of assets and countries (i.e. shares, property bonds etc) to diversify and reduce the risk of losing money. Later in this article I share a tool that can help suggest the types of assets you could invest in.
How do investment ISAs work
Generally speaking an Investment ISA is simply an empty box, if I extend the analogy used earlier. It’s up to you to decide what to put in that box (i.e. what funds to invest in). However, the advent of online investment ISAs has meant that there are now some ‘off the shelf’ investment ISAs which take care of the investment decisions for you and run your money.
So let’s assume that an investment beginner is someone who has no prior knowledge or experience of investing. These investors understandably still want to see good investment performance, with risks being managed at a cheap cost. Until very recently that often meant simply investing in a tracker fund which just mirrors the movement of a market index like the FTSE 100.
Investment ISA limits
Stocks and Shares ISAs offer such attractive tax advantages the Government sets an annual ISA allowance which is the maximum an individual can save into an ISA during a given tax year. This Stocks and Shares ISA allowance changes from year to year. For the 2019/20 and 2020/21 tax years the annual Stocks and Shares ISA allowance is £20,000. Don’t forget the tax year runs from 6th April to the following 5th April. If you use your Stocks and Shares ISA allowance every year you can quickly build up a sizeable ISA portfolio. In fact there are some people who have used their Stocks and Shares ISA allowance each tax year and now have over £1 million invested tax-free.
In a given tax year you can open a Cash ISA, Stocks and Shares ISA and what is known as an innovative finance ISA (which gives you access to peer-to-peer savings) but the total must be less than the current year's ISA allowance. Another option is the Lifetime ISA. This type of ISA is only available to people under 40 and has its own annual contribution limit. The Lifetime ISA allowance is £4,000 a year and does count towards your overall ISA allowance of £20,000. The aim of the Lifetime ISA is to help young people invest for a house or retirement as the Government provides a 25% bonus on the amount saved into a Lifetime ISA. So if you invest £4,000 the Government would top this up by £1,000. Contributions can be made until the age of 50 and still receive the bonus.
Investment ISA limits summary
- £20,000 limit for 2019/20 and 2020/21 tax year
- Tax year runs from 6th April to the following 5th April
- You can open a Cash ISA, Stocks and Shares ISA or innovative finance ISA however the total invested across each must be £20,000 or less
- Another option is a Lifetime ISA where you can invest up to £4,000 per year and get a 25% bonus from the government
Investment ISA charges
Whether you are a beginner or an experienced investor it is important to keep costs to a minimum as they eat into your eventual investment ISA returns. The charges you pay will depend on the type of investment ISA you choose. If you choose an ‘off the shelf’ investment ISA, where someone else invests the money for you, then there will be a management fee plus a fee for the underlying investments.
If you choose to go down the full DIY investment ISA route you will need to pick a broker (also known as a fund platform or fund supermarket) and then the investments to invest in (funds, shares etc). There will therefore be a charge from the platform who administer your investment ISA (a platform fee) and then a charge from the underlying funds you invest in. This latter charge is normally called the fund management charge. All of these charges are usually expressed as a percentage of the amount you invest. So the more you invest the higher the charge in pounds and pence. Overall the total cost can be about 1.5% but you can get it as low as 0.25% (see later).
Ultimately the cost will also depend on the types of investments you choose. Often investing and trading investment trusts can incur additional costs. In addition, there can be exit fees should you decide to transfer your stocks and shares ISA elsewhere.
When it comes to transferring a Stocks and Shares ISA there are two things to consider. Firstly does any investment ISA you are considering have transfer charges if you decide to move your money elsewhere? The best Stocks and Shares ISAs for beginners won’t have excessive transfer penalties (also known as exit penalties). That’s because the best investment ISA for a beginner may no longer suit an investor in the future should the investor want to take more control of how their money is invested and choose the ISA funds themselves. As their experience grows they could transfer their money to a Stocks and Shares ISA that offers more control, such as an investment platform.
It is worth noting that it is better to transfer an ISA than encasing or withdrawing your Stocks and Shares ISA and opening a new account elsewhere. That’s because by withdrawing the money it loses its ISA status and any subsequent reinvestment is deemed to be new and is set against your ISA allowance for that year. By transferring from one Stocks and Shares ISA provider to another directly you can maintain the tax-exempt status and not affect your annual ISA allowance for the current tax year. Your intended destination ISA provider produces the relevant forms required to enact a transfer. You can transfer all or part of a previous tax year’s Stocks and Shares ISA but you can only transfer the whole of any Stocks and Shares ISA from the current tax year. You can also now transfer a cash ISA into a Stocks and Shares ISA and vice versa, which you couldn’t do previously.
Where should you invest your ISA allowance?
If you are looking for someone to invest your money for you then you are simply looking for which Stocks and Shares ISA product to invest in. I cover this in the section below, the Best Stocks and Shares ISA for beginners.
However, if you want to invest your money yourself then you need to decide three things:
- What to invest in (this is known as asset allocation)
- Which funds to invest in to build a portfolio
- The best and cheapest Stocks and Shares ISA platform to put your plan into place.
What and where to invest in is the biggest hurdle facing novice investors. How much do you invest in UK equities, US equities, bonds, property etc? The answer depends on your age and your attitude to risk. So the older you are the more you should invest in ‘safer’ assets such as bonds, cash and property. The younger you are the more you can invest in riskier assets such as equities (also called shares) because you have more time to recover from any losses.
However, if you are risk-averse then your asset mix would still look different to someone of the same age as you who prefers higher investment risk. So we developed a free investment asset allocation calculator that gives you an example portfolio based upon your stated age and attitude to risk. This is not a personalised recommendation or advice.
Best stocks and shares ISA for beginners
Best managed investment ISA for beginners
For those wanting to have a professional invest their ISA allowance for them and make strategic decisions then Wealthsimple is certainly worth consideration, especially as it has no minimum investment meaning you can start small. Wealthsimple will even manage the first £10k of your money for free for the first year. I carried out a full independent review of the Wealthsimple Stocks and Shares ISA which you can read in full.
In summary, Wealthsimple offers a simple, hassle-free investment solution which is cost effective. It invests in a range of assets based upon your risk profile and is cheap. Wealthsimple will manage as much as £10,000 of your money for free for the first year. That means you only pay the underlying investment fund charges which is typically around 0.30% a year, which compares favourably against the industry standard fund charge of around 1.5% a year. Wealthsimple is able to do this because it invests in something called exchange traded funds (ETFs) which puts the Wealthsimple ISA among the cheapest Stocks and Shares ISAs. In addition, Wealthsimple's investment performance since its UK launch has been good. You can register for free with Wealthsimple and its online tool will build a Wealthsimple investment portfolio which you can look at with no obligation to buy.
If you want to invest in a simple tracker fund, rather than have someone manage your money for you, then Vanguard Investor allows you to invest in Vanguard's range of tracker funds and ETFs and extremely low cost. In fact, it is one of the cheapest ways to invest. Read my full Vanguard review for more details.
Best investment platform for beginners in the UK
If you plan to manage your own money then you need to choose an investment platform on which to manage your investments. When choosing a suitable platform cost is important but it’s not the only factor to consider. Fund availability, level of customer service, technology, reporting, tools and investment help all form part of the mix which is why Hargreaves Lansdown continues to win industry awards despite not necessarily being the cheapest. It represents the best value Stocks and Shares ISA when you consider all the aforementioned factors. Pleasingly, Hargreaves Lansdown has recently scrapped exit fees which was one of the negatives when we last updated this article in 2019. This means you can easily move your money to another platform should you wish to transfer elsewhere. The Hargreaves Lansdown’s Vantage platform is used by novice and seasoned professionals alike and so in reality, it is unlikely that you'll choose to move to another platform.
Cheapest Stocks and Shares ISA
If you are simply looking for the cheapest Stocks and Shares ISA then you can read my full analysis of the Best and Cheapest Stocks and Shares ISA.
Best performing Stocks and Shares ISA
If you are wanting to invest in a managed Stocks and Shares ISA which is run by a professional then read my Wealthsimple review, whose performance has been impressive since it launched in the UK in 2017. In the review I also compare the performance and charges of the two leading managed Stocks and Shares ISA’s (from Moneyfarm and Nutmeg).
Best performing ISA funds to invest in now
If you are looking to choose the underlying investments yourself then as stated earlier a Stocks and Shares ISA is simply an empty box in which anything you put enjoys growth and income almost completely free of tax. Plus anything you withdraw from it is tax-free. Therefore the best performing Stocks and Shares ISA will be determined by what you put into it. Once you choose your platform you need to choose the best ISA funds to invest in. To help DIY investors find the best Stocks and Shares ISA funds I created 80-20 Investor.
80-20 Investor is a DIY investment service which helps empower investors (including novices) to run their own money and choose the funds to invest in by providing fund shortlists. I also teach them about investing in a jargon-free way and run a portfolio of £50,000 of my own money live on the site which has consistently outperformed the market. You can also read through the 80-20 Investor reviews from existing members and read my advice on how to get started. If you want to find out more I suggest you start with the 80-20 Investor FAQs.