Take control of your investment with a self-select ISA
Whether you are confident enough to make your own investment decisions or simply want a bit more choice, a self-select ISA may be worth considering.
This type of stocks and shares ISA is offered by share dealing companies and gives you access to a much wider range of investments that, once inside your ISA wrapper, you can trade as little or often as you like.
The rules for self-select ISAs are the same as for other stocks and shares ISAs. You can invest up to £10,200 in the 2010/11 tax year (£10,680 in 2011/12), with this maximum reduced by anything (up to £5,100 this year or £5,340 in 2011/12) you put into your cash ISA.
Returns are free of capital gains tax, interest is free of income tax and, although you can't reclaim the 10% tax credit on dividends, higher-rate taxpayers have no further income tax to pay.
As well as funds, you can hold UK and international shares, as long as they're listed on a recognised stock exchange; exchange traded funds and commodities; and bonds and gilts (government bonds), providing they are investment grade and have at least five years to run.
You can also hold cash in your self-select ISA, perhaps after selling a share or while you're deciding where to invest. Doing this is frowned upon by the taxman but, providing you're intending to invest the money, it won't cause any problems.
Some providers even pay interest on your money, although this has to be paid net and is set at a fairly low level so as not to encourage people to use it as a cash ISA.
For example, on its Vantage self-select ISA, Hargreaves Lansdown pays a blended rate dependent on the size of your balance, but its highest interest rate is only 0.25% gross. And, as this is paid net, it reduces to just 0.20%.
Using a self-select ISA gives you incredible choice. For instance, with Interactive Investor's self-select ISA you can not only pick from over 1,900 funds, but also from thousands more investments with ETFs and individual UK and US stocks.
This increased number of options will suit certain investors, as Georgette Harrison, head of marketing communications at Selftrade, explains: "They suit people who are seeking greater flexibility and choice and with an aptitude for research, analysis and decision-making - skills which, with support, can be readily transferred to investing.
"Because of the mix of capital gains tax and income tax benefits they are equally suited to long-term investors and shorter-term traders."
A fund supermarket, which gives you access to a range of funds from different fund managers, is the best way to invest in a stocks and shares ISA. These have a number of advantages over other distribution channels.
For starters, investing through a fund supermarket is cheaper than buying direct. Supermarkets negotiate significant discounts, often taking the initial charge down to 0%, so pay less to invest.
They also give more flexibility over where you invest. With more than 1,000 different funds to pick from, you can pick and mix the best funds from different fund management groups all within the same ISA wrapper.
On top of this, it's easy to chop and change if you find that one isn't performing as expected.
The tools and information fund supermarkets provide is another winner. As well as research and fund information, so you can compare funds quickly and easily; they also give you access to tools that can help you assess the risk within your portfolio.
There are a number of fund supermarkets available, each with a slightly different range of funds, so check what's available before plumping for one in particular.
Fees and charges
All this choice and flexibility comes at a price, though, and when comparing self-select ISAs, it's essential to weigh up all the costs.
One of the first to consider is the dealing charge. Although most self-select ISA providers use fund supermarkets so there's often no initial charge on funds, you'll pay dealing charges when you invest in shares.
These vary - for example, with Hargreaves Lansdown's Vantage you'll pay £14.95 to buy or sell shares; with TD Waterhouse and Selftrade this is £12.50 and at The Share Centre it's 1% of the value, subject to a minimum charge of £7.50.
If you want to trade frequently you can take advantage of regular trader deals. Richard Shiel, investor centre representative at TD Waterhouse, explains: "If you carry out more than 15 trades in the previous three months, you can take advantage of our frequent trader rate of £8.95."
Some frequent trader deals come in cheaper but might throw in an additional charge. For example, at The Share Centre, the 'Trader' option gives you a £7.50 dealing charge but an additional quarterly fee of £20.
You can go lower still on dealing charges if you're happy to forfeit some flexibility. By using a bulk-buy service such as that offered by Interactive Investor, Halifax and TD Waterhouse, you can get the cost of buying shares down to just £1.50.
As well as weighing up the dealing charges, you should also compare administration charges. Some self-select ISAs don't charge this fee. This is the case with TD Waterhouse (if you have more than £5,100 in your account) and Interactive Investor. Others will levy a fee or percentage of your account.
For example, Hargreaves Lansdown charges 0.5% of the value of your account, subject to a £200 maximum; Selftrade charges £35 a year, although this covers other accounts you hold with it as well; and The Share Centre charges 0.125% a quarter on the balance of your account, excluding the value of any unit trust and open-ended investment companies, subject to a minimum of £5.
As well as weighing up the cost of running your self-select ISA, also look at the added extras. Many of the share dealing services will provide access to research and best-buy tips to help you pick investments for your ISA.
It's also worth looking at the dealing options on offer. Harrison explains: "Limit orders are available to give you additional control over your investments by allowing you to set prices at which you'd like to buy or sell.
"These will include stop loss, limit buy, limit sell and trailing stop loss. Most brokers will offer all or some of these, typically at no extra cost."
Another charge to consider is the transfer fee that could be levied if you decide to switch your self-select ISA to another provider. These vary hugely: for example, Interactive Investor charges £10 per stock transferred out; The Share Centre charges £15; and TD Waterhouse £35.
As these charges are for each company's shares you hold, it makes sense to pick the right self-select ISA provider from the start.
Transferring self-select ISAs
If you have already used up your ISA allowance, you can transfer an existing ISA, either cash or stocks and shares, to a self-select ISA.
To do this, just let your new ISA manager know and it will oversee the whole process. Some will even absorb the charges your old ISA manager might levy for closing your account. For example, Selftrade will pay up to £100 to cover the cost of transferring existing ISA accounts.
Harrison says it's worth considering consolidating accounts.
"This will give you the convenience and simplicity of having all your ISA investments under one roof. Also look out for ISA providers that operate separate ISAs for each tax year. They'll charge a fee per account, and it's also much harder to take a consolidated view of your ISA investments," she explains.
You might also want to consider moving your existing investments into a self-select ISA to make them more tax-efficient. Although you can't transfer straight in, Shiel says you can take advantage of something called 'bed and ISA'.
"We'll sell your investment for you and then buy it back within the ISA wrapper. You'll be out of the market but we try to minimise this as much as possible and, where you're moving shares into your ISA, we'll only charge you one lot of telephone commission," he explains.
There may also be a capital gains tax charge on the sale if you've made a gain, but once inside the ISA wrapper this will no longer be a concern.
Troy Asset Management Trojan Fund
Ben Yearsley, investment manager at Hargreaves Lansdown, says: "The fund invests in assets such as government and corporate bonds, gold, global equities and cash to make money in all market conditions."
Legal & General Dynamic Bond
Darius McDermott, managing director at Chelsea Financial Services, says: "I'd avoid getting stuck in any one fixed-interest asset class and go for a strategic bond fund that can better mitigate interest rate risk."
Investec Cautious Managed
Patrick Connolly, spokesperson for AWD Chase de Vere, says: "It's conservatively managed and so, even though the manager often takes a contrarian view to the industry, returns have been reasonably consistent."
Jupiter Japan Income
Ben Yearsley says: "Japan is simply the cheapest developed market on many different valuation criteria."
M&G Global Basics
Darius McDermott says: "This fund invests in strong Western companies tapping into the potential of the Asian market. It's also managed by the highly regarded Graham French since its launch."
Rathbone Global Opportunties
Patrick Connolly says: "It has the flexibility to invest in any of the world's recognised markets with a decent long-term track record."
GLG Technology Equity
Ben Yearsley says: "Technology companies have never been in better shape. They have cash on the balance sheets and both corporate and consumer spending."
Darius McDermott says: "I'm backing agriculture to perform, the global population is set to jump from six billion to nine billion by 2050 so there'll be plenty more mouths to feed. This fund gives you exposure right across the food supply chain."
JPMorgan Emerging Markets
Patrick Connolly says: "The growth in emerging markets continues to outstrip that in Western economies and without the huge debt burden. There are significant risks, so a well-diversified fund such as this is the best approach."
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.
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.
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.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
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.
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 property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
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.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
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.