Savings account Guides

Share ISAs

By Hazel Cottrell hazel.cottrell@consumerchoices.co.uk

If you want to invest in stocks and shares, putting your investments in an ISA wrapper can be a great way to maximise your returns (Updated 6/10/09).

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The tax benefits of stocks and shares ISAs are particularly advantageous to higher rate taxpayers or those likely to pay capital gains tax. However, those who pay tax at a basic rate can also benefit from a stocks and shares ISA.

In this guide we look at the questions you should ask before you invest and discover how to put your stocks and shares ISAs to the best use.

• Is investing right for me?
• Choosing a stocks and shares ISA
• What can I invest in?
• Collective Investments
• Where to buy shares ISAs
• Costs and charges of shares ISAs
• Withdrawing money from a shares ISA
• Getting independent financial advice
• Related articles

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Is investing right for me?

If you want to invest in the stock market, then a stocks and shares ISA can provide a handy tax wrapper under which to do this. However, investing in the stock market can be a risky business and requires careful consideration. It involves an element of chance and is not suited to everyone.

Unlike a cash ISA, whose value can only increase, the value of a stocks and shares ISA can go DECREASE as well as increase.

Before you decide whether to invest your cash, you should consider the following questions:

• Are you debt free? - If you have any kind of debts then you should focus on paying these off before you make any kind of investment. The interest you are paying on your debts will almost definitely be greater than any returns you’ll receive for from your investment.
• Have you got rainy day savings? - You should have saved enough money in an easy access account to provide for yourself and any dependents for at least 3 months, before you consider investing money elsewhere.
• Can you leave your cash invested for five years? - If you think you may need your cash back within the next five years, investing it in the stock market is not likely to be your best option. This is due to the charges you’ll have to pay and short-term market fluctuations.
• Are you willing to risk losing cash? - Investing in the stock market is a gamble and does involve a variable element of risk. It’s important to be aware that the value of your investment may decrease as well as increase.

If you can answer yes to all these questions, then you may be ready to invest in a stocks and shares ISA.

However, before investing any amount of money, it would be wise to contact an independent financial adviser (IFA) who can provide you with detailed information that relates directly to your own personal circumstances.

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Choosing a stocks and shares ISA

When choosing investments for a stocks and shares ISA, your options are almost unlimited.

Due to the variety of investment options, the risk profile of a stocks and shares ISA can be anything from very low to very high or anywhere in the middle.

The type that suits you will depend on your own personal circumstances, investment objectives and attitude to risk.

For the tax year 2009/10 which ends on 5 April 2010, if you are under 50 you can invest up to £7,200 in a share ISA, and if you are over 50 you can invest up to £10,200.

For the tax year 2010/11, everyone can invest up to £10,200 in a share ISA.

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What can I invest in?

A variety of non-cash assets can be held within a stocks and shares ISA. These include:

• Individual shares and corporate bonds issued by companies officially listed on a recognised stock exchange anywhere in the world
• Collective investments such as unit trusts, investment trusts and open-ended investment companies (OEICS)
• Exchange traded funds
• Gilts and bonds

You can only invest a stocks and shares ISA with one financial institution each year.

If you want complete control over your investments you can opt for a self-select ISA. This is usually managed by a stockbroker and you can place within it the shares in individual companies of your choice. These ISAs give you the most flexibility and choice, but if all your money is invested in just a couple of companies then the risk of losing it can be very high.

However, the most common use for a stocks and shares ISA is for collective investments. In a collective investment your money is pooled with that of other investors and invested in selected shares based on specific criteria.

The value of your investment depends of the collective performance of the shares selected. This approach is known as diversification and means that if one company in the collective portfolio does lose money, there are plenty of others to compensate for the loss.

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Collective Investments

Most first-time investors will start with collective investments. Of these, there are four main categories to choose from:

1. Equity income funds – The managers of these funds use your money to invest in companies that they think will deliver consistently high dividends. They will generally choose a selection of shares based on geographic or sector criteria. There are an enormous number of funds to choose from, so you should look for one that has a clear, defined strategy that you understand.

• Equity income funds haven’t performed fantastically in recent years, but the depressed market may now be ready to be taken advantage of again.

2. Fund of funds – Rather than injecting your money directly into shares, fund of funds (FOFs) managers invest in other funds, thus utilising the expertise of a number of other fund managers. This means you become less reliant on one asset to make you money and, through diversification, should minimise risk. On the downside, the costs can be higher as effectively you are paying both for the underlying fund management and the actual fund manager himself/herself.

• Because fund of funds benefit from the expertise of many managers, they can be a good place for a first time investor to start.

3. Balanced managed funds – These are similar in principle to FOFs, but have a restricted maximum equity exposure of 85%. This means that 15% of the fund is always held back and not invested. The investment ceiling thus limits the amount of money you risk losing, but also caps the amount of money you can make.

• Because they always hold a percentage of the fund back, balanced managed funds are suitable for those who don’t want to risk it all.

4. Tracker funds– The idea of trackers is to maximise gains by minimising costs. Instead of using costly fund managers and researchers, tracker funds simply invest in all of the companies in a given index (such as the FTSE 100) according to their market weightings. Trackers are the cheapest way to spread equity investments.

• The tracker has been a steady and fuss free investor but with the FTSE 100 suffering an annual fall of 31% in 2008, it’s clear that they are not without risk.

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Where to buy shares ISAs

You can buy stocks and shares ISAs directly from the fund managers who manage collective investments.

However, it can actually be more cost effective to buy from an IFA as many will rebate some of their commission so that the initial charge is reduced.

You can also buy your ISA from “discount brokers” and “fund supermarkets” which also offer discounts.

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Costs and charges of shares ISAs

When choosing a stocks and shares ISA it’s important to look at the charges that you will have to pay for it. The cost of a stocks and shares ISA depends on where you buy it and in what you invest it, but will not normally be higher than if you chose to invest outside your ISA.

The charges are used to pay commission to financial advisers, pay fund managers and cover admin costs.

Most ISAs come with initial and annual management charges. The initial charge can range from 0.5 – 5.5% although many companies will offer discounts on this charge. The annual management charge typically ranges from 0.5 – 2%, depending on the type of fund that you choose to invest in.

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Withdrawing money from a shares ISA

As with cash ISAs, once you have used your allowance for the current tax year, any money you withdraw can not be paid back in to your ISA. You may only pay in the set amount each year, regardless of how much you withdraw, so think carefully before making any withdrawals.

Any income you receive from your investment is treated in the same way as money withdrawn, so if you are looking to build up your capital investment, you may want to consider an “income re-investment” option which automatically adds your income to your capital.

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Getting independent financial advice

Unless you are an experienced investor, the best way to make the most of your stocks and shares ISA is to get advice from an independent financial adviser (IFA) who specialises in investments and is authorised by the Financial Services Authority (www.fsa.gov.uk).

If a product that they recommend turns out to be inappropriate, you can complain to them and if your complaint is unresolved you can take it to the Financial Ombudsman Service (www.financial-ombudsman.org.uk) which can award compensation

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