Self-select ISAs: The ISA options for investors who want to make their own decisions

Fund managers may dominate the advertising billboards at this time of year but ISAs are far more than just tax-efficient wrappers for unit trusts and open ended investment companies (OEICs).

Many investors overlook the benefits of self-select ISAs, in which you can hold a wide variety of investments ranging from UK and overseas shares to exchange-traded funds and UK government gilts.

These ISAs can give you full control over your investments and allow you to consolidate and tailor your plans to meet your individual requirements within a transparent charging structure.

The most obvious group likely to benefit from self-select ISAs are those investors who like to choose their own shares. And if you are one of those that think that the stockmarket falls have created an attractive buying opportunity, it makes sense to hold shares in an ISA where they will be free of capital gains tax.

Keith Loudon, senior partner at stockbrokers Redmayne Bentley points out: “For frequent traders, there are potentially huge savings to be made by sheltering their trading activity within an ISA. This volatility is not a reason for concern but should be a real positive, giving investors tremendous opportunities for short-term trading wins, and within an ISA these gains are sheltered from capital gains tax.”

If you have existing shareholdings, it is also worth considering transferring them into a self-select ISA.

Although it is not normally permitted to switch shares directly into an ISA, many providers at this time of year offer ‘Bed and ISA’ arrangements, which means they will sell your shares and buy them back inside an ISA for you, but will only charge you for one of the deals. As the self-select ISA limit is £7,200, less than the £9,600 capital gains tax allowance, if done carefully, a tax charge can be avoided. However, Alternative Investment Market securities and gilts with less than five years to maturity are not allowed.

Indeed, the only occasion when it is permitted to transfer shares directly into an ISA is when employees acquire shares through an employer’s ShareSave scheme, and the transfer must take place within 90 days of the shares being acquired.

Self select ISAs are offered by a variety of providers from traditional stockbrokers such as Charles Stanley and Killik &Co, to purely online brokers like e*trade and Selftrade and financial advisers, including Hargreaves Lansdown. Choosing between them will partly depend on how wide an investment choice you want.

Although self-select ISAs are generally thought of as primarily a vehicle for those who want to invest in shares, they are also very useful for investors who want to hold a combination of investment funds and shares. For fans of investment trusts, for example, Alliance Trust Savings ISA is a low-cost option with no annual management charge which gives access to all UK investment trusts as well as all other UK shares, gilts and bonds.

Hargreaves Lansdown’s Vantage ISA offers a wide range of unit trusts, as well as shares and investment trusts.

An alternative to traditional collective funds are exchange-traded funds (ETFs), which are becoming increasingly popular as their charges are typically lower than ordinary funds. These tend to track an index, such as the FTSE 100, but unlike traditional tracker funds, investors can buy in or sell out at any time during a day to take advantage of intra-day volatility. They also allow more adventurous investors to take a punt on commodities, such as gold and oil, and even more esoteric asset classes, including wheat or cotton.

Both ETFs and collective investment funds can help to reduce risk by enabling you to hold a broader spread of companies. Investors who stick to shares only will need to give greater consideration to achieving a diversified portfolio.

The benefits of this have been all too amply demonstrated by the recent massive falls in banking shares and the devastating effect this has had on many of their employers who invested heavily in their ShareSave schemes.

Richard Hunter, head of UK equities at Hargreaves Lansdown, says: “It is always important to remember the old adage about not having all your eggs in one basket. Fortunately, the low dealing charges on many self-select ISAs mean that it is possible to have a spread of holdings even within a £7,200 plan. Holdings of £1,000 are quite feasible. You need to try and get a spread of sectors, so if you hold privatisation or demutualisation shares in one or two sectors, look for businesses operating in other areas.

“ Don’t restrict yourself to the FTSE 100 – look at the FTSE 250 if you want more UK-oriented firms. And remember markets are moving a lot quicker nowadays, so don’t just buy and hold. Set a price target when you buy a share, and when that is achieved move on to another one. While diversification is a good thing, don’t try to spread your holdings too thinly. Monitoring 20 to 25 stocks will be almost impossible. If you have that many, you might as well buy a managed fund.”

You need not necessarily restrict yourself to UK shares only in a self-select ISA. You can also hold foreign shares. Not all ISA providers will facilitate this, but many will, providing settlement is possible via Crest, the London Stock Exchange’s electronic settlement system, which is the case nowadays with most major markets, such as the US and major European indices
However, be warned that dealing commissions are often higher for foreign shares and it can pay to shop around.

Because they can hold all sorts of investments, one of the attractions of self-select ISAs is that they allow you to consolidate all of your existing ISAs and PEPs in one place. This not only helps to reduce your paperwork, but enables you to plan your portfolio strategy better. You can often transfer shareholdings and investment funds from previous ISAs into a self-select ISA ‘in specie’, so you won’t have to cash them all in, though there will normally be an administration charge for each stock transferred and there may also be a closing fee.

Some providers set minimum investment levels for their self-select ISAs. But normally, it is the costs which dictate practical minimums. Investing a few hundred pounds is unlikely to be very economic.

There are three main sets of charges to take into account with self-select ISAs:

1 Dealing charges – Dealing charges usually vary according to whether the deal is conducted over the internet, the telephone or by post. Minimum charges vary considerably ranging from £7.50 to £22.50. Online dealing is cheapest and may be carried out for a flat fee. If you are planning to trade actively, consider special deals for frequent traders. Barclays Stockbrokers, for example, charges £6.95 if you deal online more than 25 times a month, while e*trade charges the same for a more reasonable 30 trades a quarter.

2 Annual fees – Most providers charge an annual administration fee for their ISA wrapper subject to a minimum and a maximum. If you have a large portfolio consisting of several years worth of ISAs, you will normally get the cheapest deal from providers with flat fees or, if the investment choice is adequate for you, from TD Waterhouse which has no annual management charge at all.

3 Exit costs – Check your exit strategy: if your provider is not up to scratch you may want to transfer elsewhere, so make sure you are aware of what this will cost. You will normally be charged between £10 and £15 per holding, plus an extra fee for closing the account, but some providers cap their exit charges, while others will enable you to transfer in at discounted rates.

A further consideration to take into account when choosing which self-select ISA is best for you is your preferred method of dealing. Most still provide the choice of dealing via either the internet or the telephone, although telephone-based share dealing is invariably more expensive. Charles Stanley and Redmayne Bentley run either telephone or branch-based accounts, or low-cost online dealing through their web-based services.

Take a look at providers’ websites to see what services they offer. By their nature, self-select ISAs tend to be execution-only, so you will be left to make the investment decisions yourself. But providers will often offer access to helpful information and research via their websites. They may also provide guidance on basic investment techniques.

TD Waterhouse, for example, has free advice in a ‘learn about investing’ section on its website which explains how to identify companies that are undervalued, by means of measures such as price/earnings ratios, ways of assessing profitability and the use of different trading tactics. Investors who open an ISA with TD Waterhouse will also have access to a research centre, which it provides in conjunction with investor information providers Hemscott, AFX News and Citywire.

Some providers send out newsletters or are also prepared to discuss investments with clients. Keith Louden, of Redmayne Bentley, says “Most investors seek a helping hand and/or need to ‘bounce’ ideas off an experienced broker. In addition, they may have new cash accumulated through dividends and corporate actions. For example, if clients have just received cash a takeover and require investments to find a good home for their cash. Our clients have the option to call a broker and discuss ideas and/or benefit from a range of regular communications with varying recommendations and other investment ideas.”

If you want to be able to discuss your investments with someone, you may have to pay for an advice-based product, but The Share Centre makes no extra charge for access to its telephone-based advice team to discuss UK shares and investment trusts as well as a corporate actions team to deal with queries arising from such things as takeovers and mergers. But the main point of self-select ISAs is to allow you to back your own judgement and take responsibility for the failures as well as the successes.

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