3 reasons to invest in a Stocks and Shares ISA

An Individual Savings Account (ISA) is an efficient way of saving due to the fact that you receive tax-free capital gains, interest and dividend payments. There are four different types of ISAs, however, most people in the UK hold either a Stocks and Shares ISA or a Cash ISA.

In 2021, 66% of the 12 million ISA accounts in the UK were held in cash, but the popularity of the Stocks and Shares ISA is increasing.

So why did around 860,000 more people subscribe to a Stocks and Shares ISA in 2021 than the year before? Here are just 3 reasons why people are turning to a Stocks and Shares ISA as a great way to help realise long-term financial goals.

1. It can help minimise the impact of inflation on your savings

Inflation is currently at 10.1%, which is significantly higher than the 2% target set by the Bank of England. Perhaps the most obvious effect of inflation is that it erodes the purchasing power of our money. With the prices of goods and services consistently increasing, it’s clear that money loses its value. And when the value of our money decreases whilst our incomes remain the same, our standard of living can reduce rapidly.

This means that your bank account may not be the best place for your money. There are two reasons why people tend to save less when inflation is high. First, as the cost of living increases, there is less spare cash to put away for a rainy day, and second, even if money is put into a savings account, it’s essentially losing value over time.

Despite the purchasing power of money being negatively impacted during times of high inflation, many people still believe that a savings account is the best place to keep their money. Our ‘Inflation Watch’ research found that only 1.6% of UK consumers thought that the biggest financial impact of inflation was on their savings. This is understandable with nearly two-thirds of respondents (59.3%) telling us that they either don’t know (31.9%) or are unsure (27.4%) how much interest their savings account is currently paying.

Of course, the benefit of cash savings is that you can generally access them whenever you need to. It’s sensible to have enough savings to cover any short-term needs, but keeping too much of your savings in cash could cost you.

With a Stocks and Shares ISA you invest your money in the stock market instead of holding it in cash. This can mean that it has the potential to grow faster than sitting in a bank account.

It’s important to point out, however, that while investing your money can result in bigger returns compared to a savings account, it does come with an element of risk. As with any kind of investing, there is a chance that you could lose money and get back less than you put in.

2. It’s a tax-efficient way to save

The key benefit of investing through an ISA is that there is no tax to pay on any dividends, growth, interest or income you receive from the investments.

There is no limit to the number of ISAs that you can have, but it’s important to remember that you can only subscribe to one of each type of ISA each tax year (6 April to 5 April). For the tax year 2022/23, you can save up to £20,000 in an ISA. You can chose to split this allowance across the different types of ISAs, so some can be saved in a Cash ISA as well as investing in your Stocks and Shares version too, for example.

The tax efficiency of ISAs will become even more crucial over the next two years as the changes to Capital Gains Tax (CGT) rules are introduced. A large cut to the tax-free allowance, officially known as the Annual Exempt Amount (AEA), is due. This is the tax free amount you are allowed before you have to pay CGT on any gains you make on investments or assets if you sell them. As the gains on investments held in ISAs are sheltered from CGT, they will be an effective tool to help reduce potential tax bills.

Read more: How to reduce your Capital Gains Tax liability

3. It’s easy to start investing through a Stocks and Shares ISA

If you have never invested before, then a Stocks and Shares ISA is a great place to start. How you invest is up to you. You can either invest a lump sum or make regular contributions – whichever works best for your financial circumstances.

And if you’re finding it difficult choosing between opening a Cash ISA or a Stocks and Shares ISA, remember that you can have one of each. We’d recommend that you speak to a financial adviser who can help you choose the right ISA(s) most appropriate to your financial circumstances.