Stocks, shares and the flexible Isa

According to April 2016 data from the Office for National Statistics, 13m adult Isa accounts were subscribed to in the 2014 to 2015 tax year.

The number of cash Isas subscribed to fell slightly by 0.2m and those to stocks and shares Isas fell by 0.3m. Approximately 80 per cent of all adult Isas are cash Isas.

Although the total number of subscriptions were down from 13.5m in 2013 to 2014, the amount of money put into these savings products rose substantially.

According to Simon Massey, director of wealth management for MetLife UK, Isas are a massive retail investment success story.

“HM Revenue & Customs’ data shows the total invested into stocks and shares Isas is currently around £245.5bn, with 3m investing in such accounts each year,” he said.

For the sixth consecutive tax year, investments into stocks and shares Isas were roughly equal to those in cash Isas.

This compares with 2008-2009, during the recent financial crisis, when cash took the lion’s share of total investment.

A huge number of people are missing out on greater potential returns. Stocks and Shares Isas should be considered as a go-to option for investors of all levels. Richard Donegan

Also, higher earners - those with £150,000 or more in income - show a strong preference for stocks and shares Isas.

Advantages to stocks and shares

Richard Donegan, managing director for Selftrade, said people investing in stocks and shares will be better off than sitting in cash.

“Investing in the stock market is a viable option to achieve a higher return on investment,” he commented.

“Once the impact of inflation is stripped out, according to the 2015 Barclays Equity Gilt Study, investing in stocks and shares can deliver a return of 5.7 per cent, compared with just 1.5 per cent in cash.

“Yet our own research shows just 10 per cent of UK savers are sheltering and growing their savings by using a stocks and shares Isa. This means a huge number of people are missing out on greater potential returns. Stocks and Shares Isas should be considered as a go-to option for investors of all levels.

“They hold a wide range of investments and asset classes and have the added benefit of all the obvious tax advantages,” Mr Donegan added.

Potential disadvantages

There are some disadvantages, however. One, according to Mr Donegan, is the seeming fear many investors have of dipping their toes into the stockmarket.

He added: “We discovered many people are put off investing due to the risk to their money - at 36 per cent - while 25 per cent said they were put off because of a lack of understanding.”

According to Tom Williams, chartered financial planner for WH Ireland, investors must consider the inherent risks of the underlying investments.

“Also, there is a cost when transferring between providers, and charges vary from each provider,” he said. “Moreover, not all the available investments are covered by the Financial Services Compensation Scheme.”

Simon Bashorun, financial planning team leader at Investec Wealth and Investments, commented: “It’s not an immediate disadvantage but given the dividend and capital gains tax allowances, many investors do not pay tax on their equity income and gains.”

This means the comparative tax advantages of a stocks and shares Isa may be limited for some people, pointed out Patrick Connolly, certified financial planner for Chase de Vere.

“There is the danger people who are not taking independent financial advice could be tempted into top-performing but high-risk specialist investment funds, possibly just as performance starts to turn sour,” he added.

What is a Flexible Isa?

“The possibility of benefiting from the new Flexible Isa rules enabling the withdrawal of cash and replacement within the Isa wrapper within the same tax year, without subscriptions being affected, will be an advantage”, said Mr Bashorun.

According to the HM Treasury website, the Flexible Isa feature provides the ability to withdraw and replace money in an Isa. This was announced in the March 2015 Budget as a sop to investors wanting more freedom with their Isa investments.

Providers who have Flexible Isas - and not all of them have created this facility - will choose the accounts into which clients can make replacement payments. For example, if someone is withdrawing from an old Isa, they may only be able to repay into that same account.

As the repayment does not count to an annual subscription, an investor can make a repayment to as many Isas as they have made withdrawals from without having to complete a new application.

However, if they have invested the full amount into a Flexible Isa, and withdrawn some, the client can re-subscribe or subscribe to a cash Isa or the new innovative finance Isa.

There are certain rules involved with flexible Isas:

■ Withdrawals only apply to cash withdrawals, which includes sale proceeds and dividend withdrawals.

■ Money can only be replaced within the same tax year that it was withdrawn.

■ Replacement payments won’t count towards your annual subscription limit (unless you pay in more than previously withdrawn).

■ The feature can be applied to old and new Isas.

■ The Flexible Isa ability is not transferable to another Isa provider.