ISA’s.. Which Type Best Suits Your Needs?

Hopefully, at the end of each month you have a bit of money left over, to save.  It’s hard to get a decent return anywhere, nowadays.  In the UK, many of us plump for an ISA, for our savings.  There are a few different variants but ultimately the basic Cash ISA and the Stocks and Shares ISA are the best known and widely available.  The current maximum annual allowance is £20000, which can be spread across different ISA types.

So do you currently have a Cash ISA and/or a Stocks & Shares ISA?  One of them, both or neither?  Cash ISA’s are far more popular but should they be?  All UK taxpayers have an annual £1000 allowance on interest from savings.  Therefore for many savers, the tax free wrapper provided by the Cash ISA won’t actually save them any money, when you consider the low rates of interest on offer.

Before you read further, I need to clarify, I’m not a financial adviser or work in the financial sector or offer any advice.  What follows are just my personal thoughts and experiences that relate to myself only.  Your circumstances will be different to mine so please bear that in mind.

For many years I just held a Cash ISA.  I understood it, I could work out roughly how much I would earn each year and it was easily accessible.  Sounds great?  Well actually for me, no it wasn’t great.

Yes I knew of Stocks & Shares ISA’s but I didn’t really understand them.  I knew, like the Cash ISA, there was no income tax to pay, additionally no capital gains tax sounded good.  I also liked the sound of compounding, where you make money on money already accrued to help increase your returns, but there were still questions.  How do I open one?  How and what can you invest in?  Do I need a degree in investment management to run it?  It was mystery.  Then there were the scary disclaimers.. ‘you could get back less than what you put in’, ‘investments can go down as well as up’.  Ouch!

I just stuck with what I knew, taking the pitiful returns of the Cash ISA and things just got worse with even more dwindling returns.  Current Cash ISA rates are generally less than the rate of inflation.  That means in real terms the cash in a Cash ISA will likely be worth less in a year’s time than it is now, this when factoring in its reduced spending power.  Ouch again!

About 5 years ago, I finally took the plunge.  After much researching, deliberating, hesitating and ruminating, I opened a Stocks & Shares ISA with Fidelity.  It was a company I’d heard of, seemed to offer a good range of investments at a reasonable price and reviews were generally favourable.

The application process was all done online and was actually surprisingly easy.  I remember nervously transfering £500 from my bank account, with no real idea how I would invest it.  At the time, they mostly offered investment funds.  I decided to look for a low cost tracker fund, being what seemed to be the simplest option.  Fidelity World Index is what I eventually plumped for.

To my relief, it didn’t immediatley plummet in value the next day.  In fact, it slowly started to increase over the next few weeks.  Of course there were bad days too but I started to accept the rollercoaster nature of its valuation.

I then started to diversify by investing in three other index trackers, in the UK, US and Emerging Markets.  With varying success they all increased over time.

I started doing more research on different funds.  I particularly found the daily investment articles at the Motley Fool useful.  Something I still read, daily.

I then bought my first actively managed fund, from Fundsmith.  Unlike the tracker funds that just aim to replicate the performance of an index, these funds aim to outperform them.  Of course, this isn’t guaranteed and the costs are higher but it’s performed well so far for me.

Over the next few years I continued to add more money to my Stocks & Shares ISA.  I opened more funds in the process for better diversification.  I aimed for funds that had consistently performed well in previous years.

In February 2020, I tentatively bought my first UK share.  Shares had the potential to give me capital growth plus dividends, which appealed to me.  I invested £250 in the housebuilder, Taylor Wimpey.  On reflection, when considering dealing fees and tax, £250 was probably a bit low to buy in a single share.  Fortunately, in this case it worked in my favour.  A month later, the market crashed due to the Covid crisis.

Of course this was a scary time on many levels.  In relation to the human cost, the financial cost seems much less important but peoples savings, pensions and livelihoods all took a hit.

From a personal view, it was not comfortable to see some of my investments more than halve in value, that included my Taylor Wimpey shares.  A few years ago I would have just hidden under the duvet and then maybe looked at my ISA account six months later.  Through the knowledge I’d gained during my research, I was better prepared to cope.  I was aware that falling prices offered buying opportunities.

Over the next few months I bought more UK shares, including more of Taylor Wimpey, for about half the price I’d paid a couple of months before.  They’ve recovered well since as have most of my investments.  My only significant losses were from buying shares in a couple of gold miners, shortly before the first Covid vaccine was announced.  This was of course good for most share prices but not gold miners.  This really underlined to me the value of having a diversified portfolio.  By investing in different world regions and in different industries, helped to smooth out any losses I had in one particular sector.

Another way I’ve tried to limit my risk of losses is by drip feeding money into my Stocks & Shares ISA over a period time.  That way, if there was a sudden market crash, I wouldn’t be so heavily exposed, as I would have been if I’d put in a lump sum just before it.

In investment terms, 5 years is considered a very short time period.  Over that time, the value of my portfolio has risen on average about 10% per year.  Not spectacular, but good compared to what I would have earned in a Cash ISA.

I know a Stocks & Shares ISA won’t be for everyone.  It really depends on your personal circumstances and on your appetite to risk.  On reflection, I wish I started investing when I was younger.  That would have allowed me to start slowly and then build up my pot with regular contributions.  It would also have given the process of compounding more time to take effect.

Hopefully, through wise investing, you can watch your money grow and maybe one day you will have a decent sized nest egg.  Of course there are no guarantees, but what I do know is you’re very unlikely to ever get rich from a Cash ISA.

If you wish to take out a Stocks & Shares ISA with Fidelity you could receive a £50 Amazon Gift Card.  Please read below carefully.

Please follow these important terms to qualify for a £50 Amazon Gift Card:

1.  You need to invest a minimum lump sum of £5,000 or more.

2.  You need to open an ISA account and make your investment on the same day, within one continual transaction.

3.  You need to use our referral link by clicking on Fidelity anywhere in this post.

4.  This offer cannot be used in conjunction with any other offer.

5.  Fidelity will take up to 120 days to validate the transaction and issue your voucher.  Vouchers are usually issued much quicker than this but please allow up to 120 days for validation.

6.  Amazon.co.uk voucher codes will be sent to the email address you used to sign up to the offer.

Capital at risk. Exclusions, T&Cs, ISA and tax rules apply.  Offers are subject to change.  Please see Fidelity for further details.

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