What can I invest in an ISA?

ISAs offer a safe and easy way to save and invest money completely tax free, but there are a large number of ISA options on the market. If you aren’t sure which ISA is for you, read on to learn more about what you can invest in ISAs of all descriptions, and how to make the most of your tax-free allowance.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
What-can-I-invest-in-an-ISA-
Source: Bloomberg

Stocks and shares ISAs are probably the most popular savings accounts in the UK, and with good reason – they offer a safe and easy way to save and invest up to a certain amount per year, completely tax free. The ISA allowance for 2017/18 is £20,000.

However, each ISA is structured differently, with different rules, benefits and risks involved. Short-term investors may enjoy the liquidity of the Cash ISA, but they are unlikely to make significant returns; while Stocks and Shares ISAs offer the best chance of a high interest rate, but they require a bit more market knowledge and investment savvy.

What can I invest in a Cash ISA?

As the name suggests, Cash ISAs can only be used for cash savings. These accounts are usually offered by High Street Banks, and as such their interest rates are closely linked with the Bank of England base rate. Since the base rate has been sitting at 0.5% since March 2009,  Cash ISAs tend to offer low interest rates with an average return of around 1.3%  – just 1% higher than the 12-month rate of inflation. 

It is quick and easy to set up a Cash ISA, and, as with all deposit accounts, your money is guaranteed up to £50,000 by the Financial Services Compensation Scheme (FSCS).

What can I invest in a Stocks and Shares ISA?

Easily the most flexible ISA structure on the market, a Stocks and Shares ISA offers tax-free access to the wider financial market. Investors can be as active or as passive as they like when it comes to a Stocks and Shares ISA, either trusting their portfolio to a professional fund manager, or choosing every stock and share themselves. 

There are three main investment categories which can be accessed via a Stocks and Shares ISA:

1.    Shares in companies
There are more than 2,300 companies listed on the London Stock Exchange alone, and you can invest in as many of them as you like through a Stocks and Shares ISA. 
If you are investing in individual stocks and shares, you may be eligible to receive dividends, which can be collected tax-free up to a value of £5,000.  

2.    Unit trusts and investment funds
Rather than buying individual shares, many ISA holders prefer to spread their exposure by investing in unit trusts and investment funds instead. Exchange Traded Funds (ETFs) or ‘index tracker funds’ are growing in popularity, thanks to their diversity and ability to spread risk. Each ETF can hold a number of different stocks, shares and bonds at the same time, and the best funds will match or surpass the average performance of the FTSE or other stock markets. 

These funds generally do well over the long-term, so it’s worth investing for a three-, five- or ten-year period before transferring your money elsewhere. For instance, despite some notable periods of loss, the FTSE 100 returned an average of 5.7% per year over the past five years (to 30 June 2016), while the FTSE Fledgling returned an average of 10.9% over the same period. This means that if you had made a one-time investment of £10,000 in an ETF tracking the FTSE 100, over the past five years you would have earned £3,194 in interest alone, or £6,775 if you had been following the FTSE Fledgling.

As long as these earnings take place within an ISA wrapper, they are also protected from capital gains tax, which usually kicks in at £11,100. 

3.    Bonds 
Bonds can be issued by the privately-owned companies or by the government, and they will offer a return over a set amount of time – usually anything between one year and 20 years.

When you buy a bond, you are essentially loaning money to a company or country. It is very rare for an issuer to default on its bond payments, so these are considered to be among the safest investments on the market. However, once your money is invested in a bond, it cannot be touched until the maturation date. 

What can I invest in a Help to Buy ISA?

This ISA has one purpose – to help first-time buyers save for a deposit on a house. It is only available to first-time buyers via banks, and it is set to be replaced next year by the Lifetime ISA (LISA).

Under the current rules, first-time buyers must deposit a minimum of £1,600 in order to qualify for an annual government bonus of 25%, and the maximum ISA allocation is £12,000. Once you buy a house, you must close your Help to Buy account. 

Next year’s LISA offers a bit more flexibility – it can be used as a pension fund instead of a deposit saving scheme. Like the Help to Buy ISA, the government offers an annual bonus of 25%, but if you are saving for retirement, you won’t be able to access it until you are 60 years old. 

Conclusion

There is an ISA option for every type of saver, and every type of investor. The sooner you start, the longer you can benefit from the tax-free incentives and compound interest available, so it is worth taking some time to develop your bespoke ISA portfolio and start saving as much as you can within the ISA limits. 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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