Investment Masterclass: Essentials

Welcome to week 3 of your six-week Investment Masterclass. My name is Maike Currie and I am Head of Content here at HL.

Last week, we covered knowing when you might be ready to invest, took a look at the role risk can play and a few golden rules of investing.

This week we’ll look at a few of the different investment accounts available to those looking to start investing.

Reminder, this course is for educational purposes and none of the information shown is personal advice. If you’re not sure which investments are right for you, please ask for advice.

Now If you’ve decided you’re ready to start investing, you’ll need to think about where you want to hold your investments. You’ll need to choose an account that works best for your personal situation.

You can think of your investment account a bit like a basket. It isn’t an investment in its own right. It’s where you hold any investments, like funds or shares you choose to buy.

You can have more than one type of account, and each will have pros and cons depending on your goals. For example, some accounts have higher charges than others and some have tax-efficient benefits. Look out for any restrictions on the amount you can put in each year, as well as restrictions when you take money out. Do remember that tax rules can change and benefits depend on individual circumstances.

There is a wide variety of investment accounts available, with each having different pros and cons. We’ll be looking at the most popular types of accounts for investors in the UK so you can understand the fundamentals of each.

Be aware that tax rules surrounding these accounts can change and the benefits of each depend on your own personal circumstances.

ISAs

One of the UK’s most popular account types is an ISA. ISA stands for Individual Savings Account. ISAs are easy to understand and they’re flexible.

ISAs are a great option to help shelter your money from UK tax as once you pay money into an ISA, it's then sheltered from UK income and capital gains tax.

There are different types of ISA to help you save or invest, depending on your goals. The four main types are:

• Cash ISAs
• Stocks and Shares ISAs
• Lifetime ISAs
• Junior ISAs

You can have any number of ISAs but you can only pay into one of each type, each tax year*, up to the annual ISA allowance. Now what’s the annual ISA allowance?

Each tax year (6 April to 5 April) there’s a maximum amount of money you can put in ISAs, that’s called the ISA allowance. You have until one minute to midnight on 5 April each year to add money to your ISAs, and the allowance doesn’t carry over.

The ISA allowance is only for the money that you put into ISAs each tax year. It doesn’t include the total amount that’s in your ISAs from previous tax years, or the money you earn from your investments in your ISA.

From April 2024 the rules around ISAs will change as so:

• You’ll be able to pay into the same type of ISA with different providers in a single tax year
• Partial transfers between providers of ISAs paid into in a current tax year will now be allowed
• There’s no need to reapply for existing ISAs each year
• A new 18 and over age limit will be in place for all adult ISAs

Cash ISA

A Cash ISA works just like a normal savings account, except you don’t pay income tax on the interest you earn. It’s a stable way to save, since your money won’t be invested in the stock market.

There are two main types of Cash ISAs – variable and fixed rate. Fixed rate Cash ISAs usually offer slightly higher rates than variable Cash ISAs, but the idea is that you don’t withdraw your cash before the fixed term. Sometimes you still can, but you might be penalised.

Now Variable rate Cash ISAs, typically called easy or instant access ISAs, will allow you to withdraw your money whenever you like, but will pay a lower rate in return for that flexibility.

When keeping your money as cash you need to take inflation into account because if the rate of inflation is higher than the interest rate you’re earning, your savings could actually go down in value over time in real terms.

So it’s always a good idea to keep some money as cash, for short-term needs like an emergency fund, or for expenses that are coming up. In the longer term, a Cash ISA might not always be the best choice. If you can accept the risk that your money will go down as well as up in value, a Stocks and Shares ISA could be a better option.

Stocks and Shares ISA

Now with a Stocks and Shares ISA you can use your money to buy shares, funds and other types of investments.

By investing you can potentially grow your money more than just saving in a Cash ISA, but there is risk with investing, because investments can go down in value as well as up, meaning you could lose money.

Stocks and Shares ISAs are generally best for investing for at least five years. That’s because the longer you invest, the greater the chance that your money will outperform cash.

When your money’s invested in a Stocks and Shares ISA you can still withdraw it whenever you need to – but remember investing should be for the long term. Your investments will need to be sold first though, so your money might not be available for a few days.

Lifetime ISA

Lifetime ISAs were created to give you a boost towards buying your first home. If you’re aged between 18 and 39 years, you can put in up to £4,000 into a Lifetime ISA and the government will add an extra 25%, up to £1,000 a year.

There are strict rules about when you can take money out of a Lifetime ISA without paying the government withdrawal charge. Once a Lifetime ISA has been open for 12 months, you can withdraw your money if you’re buying your first home (with a purchase price of up to £450,000). You can also have the option of leaving the money in your Lifetime ISA and withdrawing it from age 60.

In most other cases, if you want to withdraw your money you will pay the government withdrawal charge of 25% of the amount withdrawn, so you could get back less than you put in.

Junior ISA

Junior ISAs are for children under the age of 18, opened and managed by a parent or legal guardian. In a Junior ISA, any parent or legal guardian can open an ISA and make the investment decisions, but the account is held in your child’s name. When your child turns 18, they will get access to the money.

You cannot make a withdrawal from a Junior ISA until the child turns 18, except in very specific circumstances.

A Junior ISA can be very helpful for your child’s future. It could give them a head start on university costs, their first home, or a future nest egg.

Each tax year there is a limited amount of money you can put in a Junior ISA. The allowance is £9,000 for the 2023/24 tax year. As with all investments, there is a risk the value could go down as well as up.

Fund and Share Account

The final account we’re discussing this week is the Hargreaves Lansdown Account.

The HL Fund and Share Account is our simplest account. All of the features you need to start investing without any of the complex rules you might expect. It allows you to invest in a wide range of shares, bonds, investment trusts and Exchange-Traded Funds (ETFs) enabling you to build your own portfolio - which is of course a collection of investments you own - in the way you want to.

If you’ve already used the tax shelter of an ISA, keeping it simple could be best and you can open an account with just £1.

Unlike some tax protected accounts like pensions, the Fund and Share Account has no limits on when you withdraw your cash, although investments should be held for the long term.

To open a Fund and Share Account online, you’ll need to be over 18, live in the UK and a UK resident for tax purposes. You should also be:

• Comfortable choosing your own investments
• Confident making long-term investment decisions
• Free from significant debt (other than a mortgage)
• Clear on our charges and how you’ll be affected by tax

If you’re not sure which investments are right for you, please ask us about financial advice. Your investments may go up as well as down in value so you may not get back what you put in.

Considerations

When it comes to investing, the account you choose may have specific costs and charges related to it. It’s very important to be aware of and understand these charges before making your investments as they could influence which account is best for you.

The investments you choose may also have their own charges, such as charges from a particular fund manager. These of course are in addition to any account charges and can be found in each investment’s key investor information document or KIID for short.

Find out more about the accounts we covered in this class by following the links in the text below. Now that you’ve completed this lesson, do take a few moments to complete the quiz at the bottom of the page and check your understanding of what we’ve covered.