Should you open a self select ISA?
Whether you're using this year's ISA allowance to save for your kids, your home or your retirement, if you've got five to 10 years or more before you need to get your hands on the money, you'll usually be better off saving at least some of your money in a stocks and shares ISA.
OK, so the value of your investment could fall but history has repeatedly proven that over the years a well-managed stockmarket investment is likely to grow faster than cash on deposit and you'll have a much better chance of beating inflation.
The simplest way to access the markets is to buy a unit trust or open ended investment company (OEIC) from a fund supermarket or discount broker. You might diversify the investment by splitting your ISA allowance between two or three funds focusing on different geographical areas or asset classes such as fixed interest or property.
But what if you want to hold investment trusts in your ISA or are an active trader and want to run your share portfolio in a tax-free environment?
Alternatively, you may have the cash and expertise to build your own 'buy and hold' portfolio made up of individual shares and bonds and would rather not use the services of a professional fund manager.
FILLING UP YOUR WRAPPER
The good news is that the right ISA can accommodate all of these situations. Self-select ISAs are governed in exactly the same way as a conventional stocks and shares ISA, in terms of tax treatment, annual allowances and so on - the difference is that unlike a conventional fund-only ISA you can invest a much wider variety of investments.
Think of it as an 'empty' ISA wrapper which you can then 'fill up' with whatever qualifying holdings you like, up to the value of your annual allowance. This might include unit trusts and OEICs but also investment trusts, exchange traded funds, gilts, some bonds as well as individual shares traded on recognised stock exchanges.
However, there are restrictions: you cannot, for example, put shares of smaller companies listed on alternative investment markets such as AIM into an ISA, as they are considered too risky (although this may change after the government's planned consultation announced in the Chancellor's Autumn Statement). Also, although you can hold individual corporate bonds, they must have at least five years to run.
It's possible to transfer shares and other investments you already own – perhaps from past utility company or bank privatisations – into a self-select ISA, but if you're planning to do that, do make sure those types of investment are accepted by the provider you go with.
You will have to sell and repurchase them within the ISA, and they will count as part of this year's tax-free allowance, but they will then continue to grow tax-free.
If you receive shares from a profit-sharing or Save As You Earn scheme at work, they too can be transferred into the ISA as part of your allowance, but the transfer must take place within 90 days of receiving the share or exercising the share option.
WHERE SHOULD YOU LOOK FOR A SELF-SELECT ISA?
It depends how much professional input you want and are prepared to pay for. Execution-only online self-select accounts are the cheapest option. This is because you will not get any personalised advice about where to invest (although their websites will be packed with more generalist advice and research tools to help you).
These accounts are available from discount brokers including Interactive Investor, Bestinvest, Hargreaves Lansdown, Selftrade, Halifax and Alliance Trust Savings.
If you want to be able to access expert advice on what's best for your portfolio, you'll need to go to a wealth manager or stockbroker, but you will pay more for the service.
Be aware the range of investments on offer can vary between ISA providers, so you need to check the account you're looking at offers access to the types of holdings you're interested in. ISA accounts from some online providers, for example Neptune and Standard Life, provide access to a range of funds but not to investment trusts or individual stocks.
Bestinvest offers an advisory service only on its fund-only ISAs; if you want to hold stocks or investment trusts, you'll need to choose the execution-only option. Interactive Investor offers access to shares, funds, ETFs, bonds and investment trusts.
However, choice is not always a good thing and that means self-select ISAs are not for everyone. They certainly aren't right for people who have no interest in the workings and movements of stockmarkets and just want a more profitable home for their cash than a bog-standard savings account.
Nor is there any point paying additional charges if you are happy to stick with collective funds and don't anticipate your preferences changing in the near future.
You also have to be prepared to put time and energy into running your own portfolio, not just in selecting the investments you want but also in keeping track of company news, results and performance for your existing holdings, and in looking around for new opportunities.
STOCKS AND SHARES ISA FACTS
- All UK residents over the age of 18 can open one stocks and shares ISA (which could be a self-select ISA) each tax year.
- An ISA is basically a tax wrapper for your investments. This means that any income paid out by the investments is exempt from income tax, and gains from the sale of a holding are exempt from capital gains tax. Nor do you have to declare profits from an ISA on your tax return.
- However, dividends paid out by the underlying companies in your ISA fund portfolios are subject to a 10% tax at source, and this cannot be reclaimed from the taxman.
- You're allowed to put up to £11,280 in your ISA in 2012/13, minus any sum you have put into a cash ISA this tax year (which could be up to £5,640). Next tax year that allowance will rise to £11,520 (with a cash element of up to £5,760).
- Although you can only hold one 'active' ISA – the one for that tax year – you may hold any number of 'inactive' ISAs from prior years, where your investments continue to grow and produce income tax free but no more money can be paid in.
- If you're not happy with performance, you can switch from one investment to another within the ISA wrapper. Be warned: if you just want to hold funds and buy an ISA direct from a fund manager, you may well find a limited choice of in-house funds available if you do want to switch. It's better to buy from a discount broker offering a wide choice of funds.
Save as you earn
A tax-efficient cash saving scheme that lets employees save towards buying shares in the company they work for at a discounted price. At the end of a specified term, participating employees have the option to buy shares in the company or take the savings in cash. The share option works like a warrant, with a special share price set (known as the option price). If the company’s shares have increased in value when the term is finished, employees can buy the shares at the option price. If the shares are worth less than the option price, the employee simply takes the cash.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
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.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
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.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.