Why You SHOULDN'T Use A Stocks & Shares ISA

Sasha Yanshin
30 Oct 202111:23

TLDRThe video discusses the pros and cons of stocks and shares ISA accounts in the UK, highlighting that while they offer tax-free investment, they may not always be the best choice due to setup and management costs. The speaker suggests considering general investing accounts for beginners and emphasizes the importance of understanding individual financial circumstances and options before making a decision.

Takeaways

  • 💡 Stocks and shares ISA is a UK investment account that offers tax-free dividends and capital gains.
  • 💰 The annual allowance for tax-free dividend income in the UK is £2,000, and the capital gains tax-free allowance is £12,300.
  • 🤔 The perception that investing without an ISA will lead to high tax bills may not apply to most people due to these allowances.
  • 📈 For small to medium investors, the benefits of an ISA might not outweigh the fees charged by some platforms.
  • 🔄 There are low-cost and even free alternatives to ISAs, such as general investment accounts, which can be used for investing without fees.
  • 🌐 Free Trade and Vanguard are mentioned as options for ISA accounts with relatively low fees.
  • 🔄 It's possible to transfer investments from a general investment account to an ISA to take advantage of tax benefits if needed.
  • 👫 For couples, combining investment strategies and utilizing each person's tax-free allowances can maximize tax benefits.
  • 🚀 New investing apps may offer more cost-effective options without ISA accounts, which could be worth considering.
  • 📊 It's important to assess personal circumstances and investment goals before deciding on the best account type for one's needs.

Q & A

  • What is the main topic of the video?

    -The main topic of the video is about stocks and shares ISA accounts in the UK, specifically discussing why one might not need one and exploring alternatives.

  • Why does the video creator have a stocks and shares ISA despite the discussion in the video?

    -The video creator has a stocks and shares ISA because it can be a useful tool for some investors, and they advocate for it on their channel, but they also want to present the idea that it may not always be the best choice for everyone.

  • What are the tax benefits of a stocks and shares ISA account?

    -The tax benefits of a stocks and shares ISA account include being exempt from dividend tax and capital gains tax on the investments made within the account.

  • What is the annual allowance for a stocks and shares ISA?

    -The annual allowance for a stocks and shares ISA is £20,000 per year in the UK.

  • How does the video creator suggest a general investing account could be an alternative to a stocks and shares ISA?

    -The video creator suggests that a general investing account could be an alternative to a stocks and shares ISA because it can be set up with zero fees, allowing for free or very low-cost investment options, especially for those just starting out or with smaller investment amounts.

  • What is the zero percent dividend income allowance in the UK?

    -The zero percent dividend income allowance in the UK is £2,000, meaning one can earn up to £2,000 in dividends without owing any tax.

  • What is the zero percent tax band for capital gains in the UK?

    -The zero percent tax band for capital gains in the UK is set at £12,300 per year, allowing individuals to earn up to £12,300 in capital gains tax-free.

  • How can one maximize their tax-free allowance for capital gains?

    -One can maximize their tax-free allowance for capital gains by selling their investments in chunks, using the allowance from different financial years, and potentially doubling the allowance if investing jointly with a spouse.

  • What is the cost of the best overall option for a stocks and shares ISA mentioned in the video?

    -The best overall option for a stocks and shares ISA mentioned in the video is Free Trade, which costs £3 per month and has a 0.45% exchange fee for foreign shares.

  • What is the potential advantage of using a platform like Stake over Free Trade for US stocks?

    -The potential advantage of using Stake over Free Trade for US stocks is that Stake has a 0.5% foreign exchange fee compared to Free Trade's 0.45%, but it is a one-off fee paid only when depositing and withdrawing money, whereas Free Trade charges the 0.45% fee on each trade.

  • What new development is expected in the UK investing apps market?

    -New investing apps are expected to enter the UK market, potentially offering more free or very cheap investing options. However, they might not offer ISA accounts.

Outlines

00:00

🤔 Evaluating the Necessity of Stocks and Shares ISA

This paragraph introduces the topic of Stocks and Shares ISA in the UK, questioning its necessity despite its popularity. The speaker acknowledges their own use of a Stocks and Shares ISA but emphasizes the importance of considering whether it is always the best choice. The paragraph highlights the tax benefits of a Stocks and Shares ISA, such as being exempt from dividend tax and capital gains tax, and the allowance of up to £20,000 per year in deposits. However, it also points out the challenges of setting up and managing such accounts, including associated costs and fees, which may deter some investors.

05:00

💡 Understanding Tax Implications and Investment Options

The second paragraph delves into the tax implications of investing outside of a Stocks and Shares ISA. It explains the UK's tax allowances for dividend income and capital gains, which can be significant for most investors, potentially negating the need for an ISA. The speaker also discusses various investment platforms, including Free Trade and Vanguard, and their respective fees, offering insights on cost-effective alternatives to ISAs. The paragraph further explores strategies for tax-free investing, such as utilizing the annual capital gains allowance and selling investments in portions to maximize tax benefits.

10:01

🌟 Emerging Investment Platforms and Personalized Decision-Making

In the final paragraph, the speaker discusses the emergence of new investment apps in the UK that offer free or low-cost investing options, which could impact the decision to use a Stocks and Shares ISA. The paragraph emphasizes the importance of personal circumstances and investment styles in choosing the most suitable investment strategy. It also mentions the potential for significant savings with these new platforms and encourages viewers to consider all options before committing to a particular investment approach.

Mindmap

Keywords

💡Stocks and Shares ISA

A Stocks and Shares ISA (Individual Savings Account) is a type of investment account available in the UK that allows individuals to invest without paying any taxes on their returns, such as dividend tax and capital gains tax. The video discusses the benefits and potential drawbacks of using such an account, emphasizing that while it can be advantageous, it may not always be the best choice depending on an individual's circumstances. For example, the account may involve fees and effort to manage, which can offset its tax advantages for some investors.

💡Dividend Tax

Dividend tax is a tax levied on the income generated from shares or stocks in the form of dividends. In the UK, there is a tax-free dividend allowance that allows individuals to earn a certain amount of dividend income without paying tax. The video highlights that the zero percent dividend income allowance in the UK is £2,000, meaning that if an individual's dividend income does not exceed this amount, they will not owe any tax on their dividends, regardless of the value of their invested stocks.

💡Capital Gains Tax

Capital Gains Tax is a tax on the profit made from selling an asset that has increased in value, such as stocks or real estate. In the context of the video, it is mentioned that the UK has a tax-free allowance for capital gains, set at £12,300 per year. This means that any gains made on investments up to this amount are not subject to capital gains tax, which can be a significant advantage for investors, especially those who are not making large profits or are investing smaller amounts.

💡Investment Platforms

Investment platforms are online or offline services that enable individuals to invest in various financial instruments, such as stocks, shares, and ETFs. The video discusses the costs associated with using certain investment platforms, particularly when setting up and managing a Stocks and Shares ISA. It compares the fees of different platforms, such as Free Trade and Vanguard, and how these can impact an investor's returns.

💡Tax-Free Allowance

A tax-free allowance is the amount of income or gains an individual can earn without having to pay taxes on them. The video script explains that in the UK, there are specific tax-free allowances for both dividend income and capital gains, which can significantly reduce or eliminate the tax liability for investors with smaller investment portfolios. Understanding and utilizing these allowances is a key strategy for managing one's investment taxes efficiently.

💡Investment Portfolio

An investment portfolio refers to the collection of financial assets, such as stocks, bonds, and other securities, that an individual or organization holds. The video emphasizes the importance of considering the size and composition of one's investment portfolio when deciding whether a Stocks and Shares ISA is the right choice. It suggests that for many people, the tax advantages of an ISA may not be as significant as perceived, especially if their portfolio does not generate high levels of income or gains.

💡Annual Management Fee

An annual management fee is a charge that investment platforms or funds may impose on investors as a cost for managing their investments. In the context of the video, it is mentioned that some platforms, like Vanguard, charge an annual management fee, which can be a consideration for investors when choosing where to invest. The video compares this fee to other platforms that may have different fee structures, such as a monthly subscription or transaction fees.

💡Foreign Exchange Fee

A foreign exchange fee is a charge that may be applied when converting one currency to another, often in the context of international investments. The video discusses the fees associated with investing in foreign shares, such as US stocks, and how different platforms may have varying exchange fees. For instance, it mentions that Free Trade charges a 0.45% exchange fee for each trade, while Stake has a one-time fee when depositing or withdrawing funds.

💡General Investing Account

A general investing account is a type of financial account that allows individuals to invest in various assets without the tax advantages of a Stocks and Shares ISA. The video suggests that for beginners or those with smaller investment portfolios, starting with a general investing account, which often has no or lower fees, can be a more cost-effective option. It also mentions that these accounts can be opened in multiple and do not have the same restrictions as ISAs.

💡Financial Year

A financial year, also known as a fiscal year, is the period used by governments and businesses for accounting purposes, typically consisting of 12 months. In the UK, the financial year runs from April 6th to April 5th of the following year. The video script explains how capital gains can be managed within a financial year to take advantage of the tax-free allowance, and suggests strategies like selling investments in chunks to maximize the use of this allowance.

💡Investing Apps

Investing apps are mobile or web-based platforms that allow users to invest in various financial instruments with ease and convenience. The video mentions that new investing apps are entering the UK market, which may offer free or very cheap investing options. These apps could provide alternatives to traditional investment platforms and ISAs, potentially leading to different investment strategies and outcomes for users.

Highlights

The video discusses stocks, shares, and ISA accounts, specifically addressing why one might not need a stocks and shares ISA in the UK.

The speaker acknowledges owning a stocks and shares ISA and advocating for them, but also emphasizes the importance of recognizing they are not always the best choice.

A stocks and shares ISA is an investing account in the UK that allows tax-free investments, exempt from dividend tax and capital gains tax.

The annual allowance for deposits in a stocks and shares ISA is £20,000, which is more than the average person invests per year.

Setting up and managing a stocks and shares ISA can be more effortful and costly compared to regular investing platforms.

The best overall option for a stocks and shares ISA, according to the speaker, is Free Trade, which charges £3 per month and a 0.45% exchange fee for foreign shares.

Vanguard is another option, allowing investment only in ETFs with a 0.15% annual management fee, which is cheap for certain investment strategies.

The UK's 0% dividend income allowance is £2,000, meaning one can earn this amount in dividends without owing any tax.

For most people, the dividend tax is not a concern as it only becomes an issue with significant dividend income from large investments.

The UK's 0% tax band for capital gains is set at £12,300 per year, allowing individuals to earn this amount in capital gains tax-free.

The capital gains tax is only due when selling investments, and for most people, this will not be an issue with typical investment sizes and returns.

Investing outside a stocks and shares ISA can be done for free or at very low costs using general investing accounts.

Free Trade and Stake are recommended for low-cost or free investing options, with the latter offering a 0.5% foreign exchange fee.

Both Free Trade and Stake offer a free share for signing up and funding an account using the speaker's link.

The speaker suggests starting with a general investing account for beginners, then moving to a stocks and shares ISA if capital gains tax becomes a concern.

The capital gains allowance can be utilized strategically by selling investments in chunks across different financial years to maximize tax-free gains.

Couples can double their capital gains allowance by having separate investing accounts, further reducing tax liabilities.

The cost of having a stocks and shares ISA is relatively low, with the Free Trade ISA costing £36 per year plus transaction fees.

New investing apps are expected to enter the UK market, potentially offering more free or low-cost options without ISA accounts.

The speaker concludes by emphasizing the importance of individual circumstances and investment styles in choosing the right account type.

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