How a self-select ISA puts you in control
These are available from stockbrokers and share-dealing firms and allow you to pick from a broad range of investments to build a portfolio that suits your needs.
Among the investments that are available for self-select ISAs are shares; unit trusts and open-ended investment companies; investment trusts; exchange traded funds and exchange traded commodities; and gilts (government bonds) and corporate bonds.
It's also possible to hold cash in your self-select ISA: for instance, if you have sold shares in a company but haven't found a new home for the investment – although this isn't actively encouraged by HM Revenue & Customs.
If you do this, you'll be paid interest on the balance, although this is generally fairly low and subject to tax. For example, Hargreaves Lansdown pays 0.1% gross on balances between £7,000 and £50,000.
Because the investment decisions are left to you, this approach suits the more experienced investor who is comfortable investing directly in shares and happy to take a more active role when investing.
You've also got to be comfortable with the cost of holding these investments as, paradoxically, the do-it-yourself approach can be more expensive than handing the management over to the professionals.
To build a diversified portfolio you need to invest in a variety of investments, each of which will incur dealing charges whenever you buy and sell.
For example, taking £10 as the dealing charge, if you made two transactions a month on your self-select ISA you would run up a bill of £240 a year in dealing charges alone. On an ISA worth £10,200, this works out at an annual charge of 2.35%.
Charges and fees
With a range of different charges and fees, it's important to spend some time comparing self-select ISA accounts to pick the one that's right for you.
The first charge you might want to consider is the dealing charge. These vary considerably, starting from as little as £1.50 if you're prepared to limit when you trade, but averaging around the £10 mark for online trading.
Some firms also charge an annual administration fee for your self-select ISA. Among those that do are Hoodless Brennan, which charges £50 a year; IWeb, which charges £23 a year; and ShareDeal Active from Jarvis Investment Management, which charges £50 a year.
You may also be charged according to the balance of your account. Barclays Stockbrokers charges £30 plus VAT on balances up to £7,500 and £50 plus VAT on balances over £7,500. TD Waterhouse uses a different strategy, charging £30 plus VAT if your balance is below £3,600.
Another charge you won't be able to avoid is stamp duty. This is a government levy that's charged at 0.5% of the value of any shares you buy.
Choosing an account
Which account is right for you will depend on how you intend to run your self-select ISA. For example, if you intend to hold shares in your account for a number of years, you might want to consider how much trading you intend to do before choosing an account.
For example, like many other firms, Hargreaves Lansdown runs an active trader account as well as a standard share-dealing account.
This has a quarterly management fee of £12.50, but in exchange for this, all your trades are at a flat rate of £9.95.
In comparison, its standard share dealing account has no additional fees but dealing charges start at £9.95 for trades up to £499.99, increasing to £29.95 for those over £20,000.
This means you need to weigh up carefully not only how often you'll be buying and selling, but also the size of each trade. For example, if you intend to only buy and sell blocks of shares worth less than £500, the standard account offers better value.
However, if you're more likely to be trading £1,000 of shares a couple of times a month, which costs £14.95 a pop on the standard account, it's worth paying the £12.50 quarterly management fee to bring the trading cost down to £9.95 on the active trader account.
Another important consideration is how you would like to buy and sell shares. Accounts are available online, by phone or through branches, but if you're happy to trade online, you'll usually benefit from lower dealing charges.
For example, on its frequent trader account TD Waterhouse charges £9.95 for online trades but £19.95 for telephone-based ones.
You might also want to weigh up the extras on offer. Some of the online share-dealing firms provide lots of research, such as market reports and share tips, to help you select investments for your ISA.
If you're happy to have less control over when you buy shares, there are even cheaper ways to run your self-select ISA.
Some firms, including Halifax Share Dealing, Interactive Investor and The Share Centre, offer accounts where they amalgamate all the requests to buy each share and then buy in bulk so share-dealing costs are greatly reduced.
For example, The Share Centre charges 1% on these batch instructions, subject to a minimum of £2.50, compared with a minimum of £7.50 on its real-time share dealing account.
Interactive Investor and Halifax go even lower – they charge just £1.50 to buy shares, with Interactive Investor offering free share purchases until the end of June 2010.
Although the charges are low, this form of account does mean you forfeit timing the purchase of your shares. For example, Halifax and Interactive Investor have four days each month when they place orders, so the price of your chosen share could have moved significantly.
But, as timing the market is extremely difficult and prices could move both in your favour as well as against it, this isn't necessarily a huge disadvantage.
And, with all these accounts, you can still deal real-time at the standard prices if an opportunity presents itself that is too good to miss.
Finding a self-select ISA
With so many charges and features to consider, it's important to do your own research. Comparison website moneysupermarket.com can help you compare charges.
It enables you to check out the cost of running an account, allowing you to adjust the number and size of transactions to see how the different services stack up.
The Association of Private Client Investment Managers and Stockbrokers could also help. Its website can help you find a firm to run your self-select ISA. This allows you to search by region for those companies offering an ISA service.
You can find it online at apcims.co.uk or you can call for information on 020 7448 7100.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Sometimes known as a trading ISA, a self-select ISA gives investors full control over which assets to include in their ISA, allowing them to choose individual shares and bonds rather than investment funds. Aimed mainly at experienced investors and subject to the same investment limits of a regular ISA, a self-select ISA will usually be managed by a stockbroker on an investor’s behalf.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.