Learning how to invest in shares in a tax-free NISA (new ISA) is a great way to build your wealth and passive income.
If you’ve never tried investing in shares in a tax-free NISA but you’d like to give it a try, then keep reading, because I’m going to show you how.
If you already have cash ISAs from previous tax years then it’s probably time you started investing any extra spare cash instead of merely saving it as you’ve done before.
Investing obviously takes a little bit more effort but nowhere near as much effort as you might think it does.
And if you invest in shares instead of unit trusts like all the Independent Financial Advisors (IFA) suggest you do, the benefits can be life changing too!
What’s Wrong With Saving In A Cash ISA?
If you only have a relatively small amount of savings then saving in a cash ISA is better than saving into a normal savings account.
The main reason for this being that interest rates for ISA accounts are usually higher as well as the interest being tax-free.
For normal UK taxpayers this income tax saving is worth an extra 25% if you hold your savings in an ISA (you get to keep £100 of interest instead of £80 after 20% tax).
For higher rate taxpayers (losing 40% in income tax), the income tax saving is worth an extra 67%!
However, if you are a higher rate taxpayer and you manage your money well (living within your means), you should have sufficient money left over to be investing as well as saving.
If this describes you, then it really is a waste to be using your annual ISA allowance for cash savings.
Most people who invest into stocks and shares ISAs invest into unit trusts, OEICs and other types of mutual funds.
At least that’s the impression you get reading the financial pages of the Sunday newspapers!
But again, most higher rate taxpayers are professional people and business owners with the intelligence to build a small portfolio of company shares as well as or instead of mutual funds.
And if you can start investing in shares, you will very quickly discover (like I did) that the returns are much higher than you get with mutual funds.
What’s Wrong With Unit Trusts (Mutual Funds)?
Talk to any Financial Advisor about investing and after a long meeting, talking about your generic approach to risk, what money you have, what you earn, etc. they will end up recommending that you invest in unit trusts (mutual funds) of one kind or another.
Whilst unit trusts can be okay for some things, they are not a panacea, principally because the long-term costs are HUGE!
Even after the RDR (Retail Distribution Review) that was supposed to reduce the cost of investing in funds via an IFA (Independent Financial Advisor), nothing much has changed.
Sure, if you look at the figures that the RDR addressed, it appears that the financial services industry is now behaving less greedily.
And, of course, it is in the present Government’s interest to suggest this is true because they need us all to think the RDR (which they instigated) is a great success.
But the reality is rather different.
As you might expect, all that has happened is that the money-grabbing has moved from the area the RDR focused on (commissions) to an area it did not focus on (fees).
Hence, the money-grabbing continues albeit in a different way.
To understand what I mean, here are some examples:
Firstly, within the last 12 months, my wife’s IFA refused to allow her to make a contribution into her personal pension (which they manage for her) unless we had an annual review.
We were told there would be no cost for that review, but we recently discovered that the 3% initial charge on the money she invested was to pay for this review.
Secondly, our IFA used the review (which was little more than a sales meeting for him, by the way) to justify a change in fee structure.
In other words, he used the meeting to ask for higher fees for himself, presumably because the RDR had removed his income from unit trust commissions.
Thirdly, there was an increase in the cost of the platform used to hold my wife’s funds – an increase which was not explained and has had the effect of multiplying the cost of this platform by 11 times!
I’ve looked into the cost of moving to a different provider platform and the cost of transferring is 3% of the total fund value i.e. many thousands of pounds!
The upshot of these changes so far, are that the annual costs of running my wife’s personal pension has doubled in real cash terms from £450 to £900 every six months and a financial penalty costing thousands of pounds if we dare to move anywhere else.
So much for the RDR reducing costs and increasing transparency!
How To Invest In Shares In A Tax-Free ISA?
If you want to invest in expensive unit trusts and fund a lavish lifestyle for your IFA then there’s nothing stopping you doing that.
Indeed, for people who don’t have the capability to manage their own finances, it is a good choice.
However, as I said earlier, for those of us with the capability to manage our own finances, there is a much better option that is less expensive and doesn’t require an IFA at all.
And that is to open a stocks and shares ISA yourself and buy a few shares to keep in it.
There are lots of stocks and shares ISAs available and the new NISA available since July 1st, 2014 allows a bigger ISA allowance and more flexibility to move between cash and shares than previous ISAs.
At How To Invest In Shares, we are big fans of anything that enables taxes of any kind to be avoided legally.
Personally, I hold as many of my savings and investments in tax-efficient vehicles as possible and the ISA is one of these vehicles that I use.
If you’d like to know more about how to use ISAs to shelter your savings and investments from tax, then why not access a copy of this free ISA guide?
Alternatively, If you have any questions or comments about stocks and shares ISAs, stocks and shares ISA limits / allowances, etc. then please leave them below and I will answer…