Manage your own ISA

A self-select ISA is basically an ISA where you pick your own combination of investments. As such it allows you to pick from a wide range of different investments including UK and overseas shares, unit trusts, open-ended investment companies (Oeics), investment trusts, exchange traded funds, gilts and bonds, to build the perfect portfolio for your requirements.

And once you’ve put together your dream portfolio, if your taste, your requirements or the market changes, you can sell existing holdings and replace them with something more suitable. 

You can even hold some of your portfolio in cash if nothing takes your fancy. “HM Revenue & Customs is happy for you to sell and hold cash as long as you are actively seeking to invest,” explains Ian Benning, product development manager at The Share Centre.

Although it’s fine to hold cash in your self-select ISA for the short term, it won’t enjoy the same tax breaks as your other holdings; and the HM Revenue & Customs will not look favourably on it if you do it for a longer period of time. Holding cash in your portfolio could see you hit with a 20% fee, effectively wiping out any tax break.

Other than this rule, the tax treatment of self-select ISAs is exactly the same as for stocks and shares ISAs. Any profits you make are free of capital gains tax and there is no tax to pay on any dividend income other than the 10% tax credit which is deducted at source.

Being able to pick exactly what you want to put in your ISA means they do tend to suit the more sophisticated investor. “You need to be comfortable deciding where you want to invest,” says Benning. “Although it’s possible to get advice, it’s down to you to make the investment decisions.”

The flexibility and choice available on self-select ISAs means you do pay extra for them. Every provider will charge you for buying and selling shares and some other investments, while some will also levy fees for administration or to provide the ISA wrapper. For example, you would typically pay anything from £8 to buy or sell shares with Hoodless Brennan’s account through to £24.95 on the Merrill Lynch HSBC ISA.

You may be able to get reduced rates if you’re a frequent trader. The Share Centre charges 1% to buy and sell shares on its standard ISA trading but if you opt for its trader account there is a flat fee of £7.50 on trades up to £25,000. To get this flat fee you do need to pay a quarterly fee of £20 plus VAT, but if you trade on a frequent basis this could represent better value.

Some ISA accounts have even lower charges if you’re prepared to commit to a regular, monthly trade. For example, Halifax and Interactive Investor have accounts where, because your trade is lumped in with those of other investors, you benefit from a heavily reduced dealing charge. In both cases this is only £1.50 to buy shares.

As well as the price for dealing, you also need to check whether there are any administration fees. Some providers, including Interactive Investor and Merrill Lynch, don’t charge anything but many will levy either a fixed fee or a percentage-based charge to cover the administration.

How these charges are levied varies greatly. For example, on the fixed fee front, E*Trade UK charges £2.50 a month on its Classic ISA account; iDealing charges £5 a quarter; and Hoodless Brennan and Jarvis Investment Management charge £50 a year. Meanwhile, examples of percentage-based administration fees include Fastrade’s charge of 0.25% of the value of your ISA twice a year, subject to a maximum charge of £100, and Hargreaves Lansdown’s 0.5% charge a year, subject to a maximum of £200.

Picking the cheapest isn’t straightforward. “You need to think about how you want to use the account,” explains Kevin Mountford, head of savings and current accounts at moneysupermarket.com. “If you’re trading regularly you might be better off paying an administration charge that gives you lower dealing fees while if you only invest once a year, or in small amounts, an ISA with no administration fee may work out more cost-effective.”

You also need to consider the other assets you might want to invest in. Generally, there will be no administrative charge to hold funds, so you pay only fund-related initial and annual management charges. However, if you find yourself only holding funds in your self-select ISA, make sure you’re not paying any administration charges on the account as you may be better off with a fund supermarket.

Many online self-select ISA providers include a number of tools to help you manage your money. Benning says: “You can get all sorts of tools to help you decide how to invest your ISA. We have a share picker and a fund picker on our website, that will produce a recommended buy list based on the information you input.”

The Share Centre has a team of advisers you can call if you want a second opinion on a share or fund. The Association of Private Client Investment Managers and Stockbrokers (apcims.co.uk) can also help. It has a ‘find a broker’ facility that allows you to find stockbrokers offering ISA services in your area, or online.

Share recommendations for 2009

Tips by Graham Spooner, an adviser at The Share Centre:

Lower risk

* BP has a good cash flow and dividend prospects thanks to the restructuring the new management team is putting in place. This has received a positive response from brokers. On top of this, the oil price is unlikely to fall significantly and may even pick up.

Medium risk

* Carillion is a support services and construction company. It should benefit from its infrastructure and Middle Eastern projects and has already come out with an earnings upgrade for 2009, which is rare in the current economic climate. It also has good visibility as it maintains buildings as well as building them.

High risk

* Stobart is well known as a haulage company but it is developing into a multi-model transport and logistics company. It owns Southend airport and has an option on Carlisle airport, runs a small ports operation and is moving into rail freight. The falling petrol price will benefit the operation but there are negatives because of the firm’s increased debt and the state of the economy.