Investment expert share tips and risks of stocks and shares ISAs

I’m an investment expert – here’s what you need to know about stocks and shares ISAs’ (Image: Fidelity International) While high inflation rates continue to  erode the value of  Briton’s hard-earned cash, stocks and shares ISAs can offer a tax-efficient and high-growth solution to saving, experts have said. But what exactly are they, how do they work, and what are the risks involved? Express.co.uk spoke to Emma-Lou Montgomery, an associate director of personal investing at Fidelity International to find out. What is a stocks and shares ISA? Ms Montgomery said: ‘A stocks and shares ISA is an investment account which enables you to invest in a wide range of assets such as individual shares, exchange-traded funds, bonds, and investment trusts, without you paying tax on the money you earn from these investments. ‘If you decide to invest in ready-made funds, these will essentially provide you with a stake in lots of different companies and if those companies do well, you make money. Equally, if these companies are struggling, you might see a dip in the value of your savings. Stocks and shares ISAs present a tax-efficient method to save money (Image: Getty) ‘This is why it’s important to see any investments in a stocks and shares ISA as a medium or long-term investment, so you can ride out any market fluctuations. At present, people can save up to £20,000 into a stocks and shares ISA each year, however, Ms Montgomery noted: ‘This allowance is per person – so a couple could protect as much as £40,000 from tax – which can very quickly become a sizeable tax-efficient nest egg.’ Benefits and risks of a stocks and shares ISA Moving on to the benefits, Ms Montgomery listed the main perk being that people don’t have to pay any income or Capital Gains Tax on the returns made. She said: ‘This can make a real difference if you can leave the money you make invested, so it can continue to build over time.’ However, it’s also important to note that there are also risks that come with this investment option. Stocks and shares ISAs are intended to be a medium to long-term investment option (Image: Getty) Ms Montgomery said: ‘You have to be comfortable to leave your money invested for the medium to long term and if you do need to access your money, you won’t be able to access that money immediately. It usually takes a few weeks to sell your investments and the money to land back in your account.’ Finally and most importantly, people must be prepared that the value of their investments can go down as well as up, meaning people could end up with less money than they started with. Ms Montgomery said: ‘When weighing up the pros and cons it’s best to start with what you want to achieve. Once you have a clear goal in mind, it’s a lot easier to make plans and choose how best to save towards your goals. ‘A good option is to use a stocks and shares ISA in combination with other savings accounts, like a rainy day or emergency spending pot, so you can cover immediate expenses but also be working towards your longer-term goals.’ Ms Montgomery suggested people could also look at whether the ISA provider they opt for offers investment tools, market news and analysis. She said: ‘These resources are invaluable when it comes to staying up to date with the latest investment news and can help you develop your portfolio as you start to learn more.’ How to set up a stocks and shares ISA Setting up a stocks and shares ISA is as simple as opening any other savings account and many providers will allow an account to be opened online – people will just need their National Insurance number and a few bank details. From here, Ms Montgomery said: ‘It’s picking the investments you want. If you are new to investing, funds are a good place to start as it means you can start smaller, spread your risk, leave the investment decisions to an expert and benefit from lower fees.’ People can also invest lump sums, make regular contributions, or choose a combination of both. Ms Montgomery said: ‘A lump sum gets your money invested immediately but if you worry about picking the right time to invest, as many of us do, you can drip-feed your investment with a regular monthly contribution and spread it over time.’ Providing an example of the returns the account can amass, Ms Montgomery said: ‘If you were to put £69 a month into a stocks and shares ISA at a net growth rate of 3.9 percent, you could potentially see the value of your savings grow to £25,106 over 20 years. ‘If you want to achieve that goal sooner, investing £171 a month over a 10-year period could see your pot grow to £25,129, while £378 a month over a five-year period could result in a savings pot of £25,079.’ People can start a regular savings plan from as little as £25 or make a lump sum payment with a minimum of £1,000. Ms Montgomery added: ‘Once your account is open, you can put in as little or as much as you’d like, as long as it doesn’t exceed the £20,000 yearly ISA allowance limit.’