Six reasons you should consider a stocks and shares Isa this year

Investing the maximum allowance of £20,000 per tax year into a stocks and share Isa could see you becoming an Isa millionaire in 21 years, according to investment platform AJ Bell.

The provider has revealed the average age of its Isa millionaires is 69, although the youngest is just 37 years old.

Today's millionaires have built up their Isa wealth despite being limited to a maximum £7,000 annual contribution for the first nine years. So to get to £1m, they would have had to achieve an average 14% annual growth on maximum Isa contributions.

It's easier to become an Isa millionaire now, provided you achieve a more attainable 7% investment growth and contribute the maximum allowance.

With the end of 2020-21 tax year drawing near (officially it ends on 5 April, but thanks to Easter, some providers have earlier cut-off dates for applications, as soon as 22 March), Which? sets out six reasons you should open a stocks and shares Isa this year.

1. Stocks and shares Isas have major tax advantages

The tax advantages of stocks and shares Isas can be significant, especially if you're a higher or additional-rate taxpayer. Keeping investments in a stocks and shares Isa means you do not have to pay the following taxes:

• Dividend tax Any investments kept in a stocks and shares Isa will avoid tax on dividends altogether. Then again, the first £2,000 of dividends in any account are tax-free, so you may not benefit from an Isa if you earn less than this.
• Capital gains tax Everyone in the UK has an annual capital gains allowance. The capital gains allowance for the 2020-21 tax year is £12,300. This has been increased from the 2019-20 tax year when the capital gains allowance was £12,300. Stocks and shares Isas will only offer a capital gains tax benefit if you realise gains in excess of this allowance in a single tax year. And keep in mind that capital gains are only payable when you sell your shares for a profit, not if they simply increase in value.
  

However, stocks and shares Isas don't shield your investments from inheritance tax. If you move existing investments into an Isa, this could trigger a CGT charge.

This is because the Isa provider has to briefly sell your investments before repurchasing them within the Isa. Whether you'll have to pay CGT depends on whether your investments have increased in value since you bought them, and if you'd used up your capital gains allowance.

• Find out more: the tax you pay on savings and investments

2. It's an easy way to start investing

You don't have to be an experienced investor to open a stocks and shares Isa.

Some platforms have 'ready-made portfolios' to get you started on your investment journey, such as Vanguard - a Which? Recommended Provider. This means your portfolio will be built and managed for you; all you need to do is select the level of risk you want to take and how long you want to stay invested for.

For online investment advice, the future has already arrived. A number of online services currently help investors decide how to allocate their money and are referred to as 'robo-advice platforms'.

These are digital platforms that provide automated, algorithm-driven investment services with little to no human supervision. Popular names include the likes of Moneyfarm, Nutmeg and Wealthify.

• Find out more: how to find the best stocks and shares Isa

3. You'll usually be covered if your provider goes bust

Stocks and shares Isa providers in the UK should be regulated by the Financial Conduct Authority (FCA), meaning you'll have some protection from the Financial Services Compensation Scheme (FSCS).

Always remember to check whether your firm is on the FCA register before you invest to ensure you're protected.

This means that should your stocks and shares provider collapse, up to £85,000 of your investments will be protected. It's likely that your investments will be kept separately (ring-fenced) from the Isa provider's assets, protecting sums above £85,000, although you should check this.

Bear in mind that this £85,000 protection doesn't cover losses from your actual investments - it's the company that's holding your investments that is covered.

• Find out more:how the FSCS works

4. They can deliver higher returns

Many people still opt to put their money into cash Isas, but interest rates are currently at record lows. The best rate for an easy-access cash Isa is currently 0.6% EPR (expected profit rate), according to Moneyfacts.

Stocks and shares Isas have the potential to deliver much higher returns, although you need to be thinking long-term.

Typically, you should lock away your money for at least five years, ideally 10, to ride out dips in the market.

Your returns depend on how much your investments are worth when you sell them.

There is a risk you could get back less than you initially put in, butthere's also a chance for inflation-beating returns over the long-term.

• Find out more:how to build an investment portfolio

5. You can choose 'ethical' investments

Stocks and shares Isas should have 'ethical' investing options.

Ethical investing is an umbrella term for all approaches to investing that consider values as well as returns. The term also covers issues including, but not limited to, climate change, workers rights, gender equality, arms, tobacco and gambling when selecting companies and other assets.

As with all investing, it involves risks. But generally, ethical investing is a way to grow your savings without compromising on your values.

Providers won't focus on ethical funds solely, but most have a strong range of ethical and sustainable funds to choose from.

• Find out more: ethical investing explained

6. Stocks and shares Isas are transferrable

Unlike cash Isa transfers, stocks and shares Isa transfers aren't just about chasing a better return. There are many reasons why you might choose to transfer your account from one provider to another while not necessarily making changes to the underlying investments. You could try finding a provider with:

• Better customer service
• More easily accessible online or by mobile
• Lower fees or dealing commissions
• A wider choice of investments to pick from.

Crucially, transfers don't count as new contributions for the current tax year, so you can move money invested in previous tax years in addition to making new Isa contributions.

• Find out more:how to transfer your stocks and shares Isa

How to open a stocks and shares Isa

Before you open a stocks and shares Isa it's important to do your research to ensure the provider suits you and your investment needs.

To find the best investment platforms, Which? asked their customers. We scored platforms on their online tools, customer service, investment information, investment options and value for money.

We've reviewed leading stocks and shares providersto help you make your decision.

Which? members can exclusively read the results of our unique customer satisfaction survey, including Which? Recommended Providers and individual platform reviews. Members can log in to read our reviews. If you're not already a member, join Which? and get full access to these results as well as all our reviews.