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.
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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 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.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).