Self-select ISAs explained; how they work and what they cost

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Self-select ISAs (individual savings accounts) are the DIY version of stocks and shares ISAs. They let you hold a much wider range of investments within the tax-efficient ISA wrapper. So how do you take out a self-select ISA and what do you need to know?

Self-select ISA basics
With a self-select ISA, you’re covered by the same rules that govern ordinary stocks and shares ISAs. That means:

1. You can invest your entire ISA allowance into a self-select ISA in any one tax year. The tax year runs from April 6th one year to April 5th the next and in tax year 2016-17, the ISA allowance is £15,240.

SAVVY TIP: You can’t carry over your unused ISA allowance from one year to the next, but the allowance normally increases in line with inflation every year.

2. You don’t have to pay any extra capital gains or income tax when you cash in your self-select ISA.

3. You can transfer money from your self-select ISA: The rules let you transfer money from your self-select ISA to another stocks and shares ISA, to a cash ISA or into another stocks and shares ISA.

SAVVY TIP: If you have money invested in a stocks and shares or cash ISAs in previous tax years, you can transfer part or all of it. If it’s in the current tax year, you have to transfer the lot or none at all.

What you can invest in
There’s a variety of different investments that you can hold in a self-select ISA. These are the main ones:

  • Unit trusts and OEICS (open ended investment companies): You can invest in a unit trust or an OEIC. These are both types of investment funds.
  • Investment trusts: these are similar to unit trusts in that you can invest in a range of different companies by buying into one fund. However, there are differences in that charges tend to be lower (the good news), but these funds can borrow against their own value (which can make them riskier).
  • Shares: You can buy shares in companies on major stock exchanges but you cannot currently invest in smaller companies that have not yet listed on the main stock exchanges.
  • Corporate bonds: These are IOUs issued by companies that want to raise finance. You can invest in a corporate bond fund through an ordinary stocks and shares ISA, but if you want to invest in a particular corporate bond, you would have to do it through a self-select ISA.

What they cost
Self-select ISAs may be more expensive than ‘fund only’ stocks and shares ISAs, so if you don’t want to invest directly in shares, in investment trusts or other assets that you can put into a self-select ISA, you may be better off with an ordinary stocks and shares ISA.

Self-select ISA providers and charges:

Alliance Trust Savings: There’s a 0% initial charge. There’s a monthly charge of £7.50. It costs you £12.50 to buy or sell shares online (although you can pay less if you’re a longstanding customer).

BestInvest: There’s a 0% initial charge on most funds.  It’s free to switch funds. Online share dealing costs £7.50 and there’s a fee of 0.4% if you invest up to £250,000. The rate is lower if you invest more.

Hargreaves Lansdown: No initial charge. Annual charge is 0.45% of the value of your self-select ISA, capped at £45 a year. However, if you just invest in funds (and don’t buy shares or bonds directly), you’re not charged this fee. No charge for switching funds. Online share trading is £11.95 per trade for 0-9 deals a month.

SAVVY TIP: If you trade more than ten or 20 times in a month, the rate is reduced the following month.

Interactive Investor: There’s a 0% initial charge. The admin charge is £20 a quarter (£80 a year), which includes two transactions. Online share dealing costs £10, which reduces to £5 if you do more than ten trades a month.

SAVVY TIP: There’s a rebate of the annual management charge of — on average — 0.64% (assuming an average annual management charge of 1.5%). iii also rebates 100% of ongoing trail commission.

SelfTrade: There’s a 0% initial charge. £10 a quarter ‘inactivity fee’ if you don’t trade on any of your accounts in that period. Online share dealing costs £11.75 per trade, which reduces to £6 if you make more than 20 trades in a calendar month.

The Share Centre: There’s a 0% initial charge on over 100 funds.  Online share dealing costs 1% (with a minimum charge of £7.50). If you’re a frequent trader you can pay £20 a quarter and you will be charged £7.50 per trade. There’s an admin fee of £4 per month.

TD Direct Investing: It costs nothing to open an account.  There’s an admin fee of £30 per year, which you don’t pay if you have more than £5,100 in your ISA. Online share dealing costs £12.50 a trade, falling to £5.95 for the most active traders.

SAVVY TIP: Ongoing or trail commission of less than 0.5% a year is rebated to your account, but trail commission of more than 0.5% a year will be offset by a 0.35% platform fee.

All charges quoted in the above examples are exclusive of VAT. Always check the upfront and dealing costs when you are choosing a self-select ISA.

 

Related articles:

Pound cost averaging; how to make your investment money go further

Should you invest in exchange traded funds?

A beginner’s guide to investment trusts – how do they work?

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