Are you thinking of getting an investment ISA? Before making any final decisions, it is important that you fully understand how they work, and carefully consider both their advantages and disadvantages, to ensure that choosing one is the right option for you.
To make it easier for you to decide as to whether to get an investment ISA, Forces Compare have put together the main pros and cons of investment ISAs in the guide below.
Advantages of an Investment ISA
Easy to Open
You can open most investment ISAs with just £1, although some will require a minimum of £100 or £200 to get started. You can usually open a new account online and be fully functioning in just a few days of signing up.
Diversification Opportunities
With an investment ISA, also known as a stocks and share ISA, you have the ability to diversify your cash into different asset classes. This is because an investment ISA allowance enables you to use your cash for:
- Unit trusts
- Exchange Traded Funds (ETFs)
- Investment trusts
- Offshore funds (that invest in bonds and non-UK equities
- OEICS (Open Ended Investment Companies – collective investment schemes that are professionally managed and enable you to pool your money with other investors)
Tax-Free Income Upon Retirement
Another key advantage of investment ISAs is that you could benefit from tax-free income when you retire. There are many people who decide to use their yearly tax-free ISA allowance of £20,000 in order to invest in shares over a period of time, and then sell these when they retire, or buy further stocks.
The Possibility of High Returns
The rates available from investment ISAs can often be higher than other basic cash ISAs. It is possible to earn 3%-4% per annum, compared to a cash ISA of 1.3%-1.7%.
You are also covered for up to £85,000 through the Financial Services Compensation Scheme.
For higher returns, you can compare peer to peer investments which offer up to 8.5% per annum, but these are protected with different schemes.
Greater Flexibility
Another plus point for many account owners of a stocks and shares ISA is that you are fully in control of where, when and how you decide to invest. For some, this is highly advantageous, as you can tailor your investments so that it can include funds from a wide range of markets as well as individual shares too.
You also have easy access to withdraw your funds if you need to, but depending on the scheme this could come with a penalty or limit your overall return.
Easy to Transfer
You have the option to easily transfer your investment ISA to another ISA if need be. There are often no fees for doing so, but remember that you can only pay into one ISA per year.
Disadvantages of an Investment ISA
A Volatile Stock Market
If you decide to get a stocks and shares ISA, you need to be comfortable with the risk of stock market volatility. Like with any investment, you returns could end up moving continuously up and down (and this can be more commonplace if the markets are volatile).
Your Investments Could Drop in Value
Investment ISAs are all about risk: you could end up getting a high return on your money invested, but equally, you could end up receiving less than you invested.
In the worst case scenario, you could end up with dramatically less than you put in. This is why it is important to ask yourself whether you could financially afford to take the level of risk that naturally occurs with stocks and shares ISA, particularly when it comes to your retirement years.
Limited Amount of Protection
Another potential pitfall when it comes to investment ISAs is the limited amount of protection you may receive if something goes wrong. Under the Financial Services Compensation Scheme (FSCS) your invested cash will only be protected up to £50,000 per firm you have invested in.
Furthermore, your money up to £50,000 will only be protected under the aforementioned scheme if the investment is registered with the FSCS in the first place. Otherwise, you could end up with absolutely nothing if the firm goes bust. This is why it is extremely important to make sure that if you decide to open an investment ISA, you have verified it is registered under the FSCS, to limit any potential financial damage that could happen.
Consider Other ISAs
You need to consider your priorities when investing in ISAs, whether it is getting some security or trying to maximize your returns. Whilst they are less secure and predictable, you can earn up to 12% per annum through peer to peer and innovative finance ISAs.