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.