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What can you put into an ISA? The main investment types explained

ISAs (short for Individual Savings Accounts) were designed to encourage more of us to save and invest by offering tax breaks on interest earned.

man looking at paper work

Savers can put a range of investments types in an ISA. There are cash ISAs, specifically designed for cash products. And there are stocks and shares ISAs, which can hold a variety of different investment products, including;

  • Shares
  • Active and passive funds
  • Investment trusts
  • Bonds.

In the current tax year, for example, you can pay in up to £20,000 and you won’t have to pay income tax, capital gains tax, or tax on dividends (regular payments companies make out of their profits to reward their shareholders) on anything you hold in your ISA. But this may affect means tested benefits, depending on your circumstances. And be aware that tax rules could change in the future.

The latest figures show that UK savers put £62bn into ISAs in the 2016/17 tax year. But savings into Cash ISAs dropped by a third, partly due to the paltry interest rates on offer, while new savings into Stocks & Shares ISAs hit a record high.

What ISAs are there?

If you’re ready to turn your back on cash and dip a toe into the world of investing, there are a few ISA options to choose from. These include;

  • A Stocks & Shares ISA
  • A Lifetime ISA
  • A Junior ISA
  • And an Innovative Finance ISA.

You can split your total allowance across the different types of ISAs that are available. The exception is the Lifetime ISA, which only lets you pay in up to £4,000 a year.

The Innovative Finance ISA is a bit different in that it can only hold crowdfunding-type investments like peer-to-peer lending which you cannot hold in other types of ISA. There’s also the option of a Junior ISA which lets you invest on behalf of a child, who can only access the money once they turn 18.

Of course, investing is not risk free. Markets can fall as well as rise and you may lose your capital, meaning you could get back less than you invested. So you need to make sure your investments match your attitude to risk.

But the real reason a lot of us stick to cash is not the risk, it’s simply a lack of understanding about how investment ISAs work. To get you started, read our quick guide to the main types of investment you can hold in your ISA.

Active funds

Hold on to your finance hats, because this might get technical. A fund is a way of pooling your money with other investors and handing it to a professional manager to select investments for you. You can buy a number of units in a fund and their price changes day to day depending on how the fund is performing and whether it’s in demand.

Active funds are so called because the fund manager is trying to beat the performance of a benchmark index. This is a set of shares used as a standard against which to measure how well a fund is doing.

You can choose from a huge range of active funds (they might be called unit trusts or open-ended investment companies) all doing different things in different geographical markets. You could choose a fund which follows;

  • A particular theme, such as green energy, healthcare or global infrastructure.
  • You could go by country or region, such as UK, Europe, or emerging markets.
  • Or you could go by the size of the underlying company, from large-cap to nano-cap stocks. Nano-caps are small listed companies under $50m (£38m) in size.

And you can choose by asset type, such as;

  • Equity funds, which hold stocks and shares.
  • Bond funds, which hold fixed income investments and let you lend money to companies.
  • And property funds, which hold either bricks and mortar buildings or shares in listed property companies.
  • And those which hold a mix.

Passive funds

Exchange-traded funds (ETFs) and index trackers are known as passive products. This is because they just track an index, such as the FTSE 100, and aim to replicate its performance. Because of this, they are typically cheaper than an active fund where the manager regularly changes the underlying investments.

Index trackers are funds where your cash is pooled with that of other investors to buy a selection of investments. While ETFs are listed on the stock market and trade just like shares (small slices of an individual company).

Investment trusts

Investment trusts (also called closed-ended funds) are companies which manage a pool of investments. They are listed on an index and you can buy and sell their shares, which trade just like any other stock. They can trade at a discount or a premium to their net asset value (meaning the total value of the investments they hold). So you could pick up a bargain when a top-quality trust moves to a discount price.

They are also able to use leverage (borrowing) to invest and can keep cash in reserve to cover their future dividend payouts to investors rather than paying out all the dividends they get from companies they hold at once.

This is why a number of investment trusts have impressive records of rising dividend payouts over many years. And also why they are attractive to investors looking for regular income.

Shares and bonds

You can hold individual shares in listed companies in an ISA, including smaller companies listed on the Alternative Investment Market (AIM). You can also hold government bonds or corporate bonds. These are a bit like IOUs between the issuer and an investor for repayment with interest at a later date. Holding individual stocks and bonds may come with more risk and higher dealing costs than just buying a fund though, so be sure to do your research. As with all investments, due to market fluctuations, the value can go down as well as up. So it’s possible to get back less than you put in.

So what should you put in your ISA? To help you choose, there are some really good publications aimed at DIY investors on the newsstands, and lots of free research and information online. Or if you are still unsure, you can buy ready-made ISAs where the hard work has been done for you.

Learn more about OneFamily’s stocks & shares Lifetime ISA and Junior ISA.

Written by Hannah Smith – Financial Journalist


Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.