The best ways to split your ISA allowance

Q: I have an ISA trading account with Selftrade, which has accumulated over £100,000 over the past 10 years. My understanding is that if Selftrade failed my compensation is limited to £50,000. What's the best way to split this up over multiple institutions?

A: Patrick Connolly is a certified financial planner for AWD Chase de Vere.

Selftrade is one of the UK's largest execution-only stockbrokers. It is a subsidiary of Boursorama, one of Europe's leading online stockbrokers and part of the Société Générale Group. This gives the impression that it is a strong and secure organisation although, as we have witnessed in the banking crisis, the solvency of any firm cannot be guaranteed.

Selftrade is authorised and regulated by the Financial Services Authority. This means that if it was to default and be unable to meet the claims against it, investors would be covered by the Financial Services Compensation Scheme (FSCS) for losses up to £85,000; the £50,000 limit you mentioned was raised at the start of January 2011.

This limit is determined per investor per company and it makes no difference how many separate accounts you have with Selftrade.

The only way to negate this potential risk is to invest with more than one organisation. However, the larger your investment portfolio is, the more cumbersome this can become, as you will need to invest with a greater number of organisations to remain within the £85,000 limit.

There is not necessarily a right or wrong answer to this, although an important factor may be whether this is all the money you have or part of a larger portfolio.

It is then a case of you weighing up the potential risk of the firm you are investing through going into default against the additional administrative hassle of investing through a greater number of organisations.

Check out the latest: Best cash ISA rates

Should I put my capital in an ISA?

Q: If I wanted to hold £5,100 in cash and £10,200 in equities, would you recommend holding the stocks and shares in an ISA and the cash outside, or the cash and half the equities in an ISA and the remaining equities outside (or some other split)?

A: Nick McBreen is an IFA at Worldwide Financial Planning.

If my maths is correct, you are wondering what to do with around £15,300 of capital. With current deposit interest rates at derisory levels, many people such as yourself are looking at other options including stocks and shares.

To help you with your decision-making, I suggest you consider the following questions. Do you need to be able to access this capital quickly? Equity investment is for the medium to long term and, before you start paying into a stocks and shares ISA, you should have sufficient capital easily available for unforeseen emergencies.
Also ask yourself: what is your experience of investing in the stockmarket? Investing in the markets should be done only if you understand what you are investing in - if in any doubt, seek the advice of an independent financial adviser.

You will need to work out what your attitude to risk is, as it's crucial in determining if and where you invest. Whether you're still working or retired will also be a deciding factor on your investment strategy. There may be opportunities to use some or all of the capital to enhance your retirement funds.

Work out if you need income or capital growth or a combination of the two. Investing in collective funds allows you to mix and match between income generating funds and those with potential for capital growth.

Finally, it's important to clear any outstanding liabilities or debts before saving money into an ISA. Also be aware of the rules on ISA investments and the limits on how much you can allocate and where. Remember you cannot spread your ISA contributions across a number of providers in any given tax year.

The ISA rules explained:

• You pay no income or capital gains tax on savings or investments held in an ISA.

• The annual allowance is £10,200.

• Up to £5,100 of this can be put into a cash ISA, or you can put up to the full allowance in a stocks and shares ISA.
• You can open one cash ISA and one stocks and shares ISA each year.

• It's possible to  transfer previous years' ISAs without losing the tax-free status - for example if your cash ISA becomes uncompetitive.

• You can also transfer cash ISAs into a stocks and shares account, though not the other way around.

• You can't rollover previous years' allowances, so use it or lose it.

More about

Your Comments

I retired last year and have received a lump sum as part of my annuity. As my wife and I are on Guaranteed Pension Credit, if I opened a cash ISA, and therefore had some savings, can you tell me if we would be penalised for Pension Credit? We need something with fairly quick access, in case (God forbid) the boiler packs up etc.

Nick McBreen is an IFA...

And doesn't that (non-)answer just prove it. Now, go and read the question again and try to ANSWER the QUESTION.