interactive investor isa guide

A guide to

ISAs

The information contained in this guide does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. You are recommended to seek advice concerning suitability from your investment advisor.

1

Understanding ISAs

What are the benefits of an ISA?

What investments can I hold in an ISA?

Choosing an ISA provider

How Interactive Investor can help you

ISAs (Individual Savings Accounts) are not investments in their own right. Instead, they are tax-efficient accounts which can hold a diverse range of assets including cash, shares and funds.

2

Understanding ISAs

Interactive Investor ISA

There are two types of ISA: The Cash ISA, and the Stocks and Shares ISA.

How much can I Invest in an ISA?

The amount you can invest changes year by year. This tax year, 2013/2014, you can invest up to £11,520 in a Stocks and Shares ISA or up to £5,760 in a Cash ISA. You can hold both a Cash ISA and a Stocks and Shares ISA, so long as your cash or investments don’t exceed your allowance. Withdrawals are permitted, but once you’ve taken the money out of your ISA you can’t replace it. If you have some allowance remaining you could add additional amounts.

Cash ISAs

Cash ISAs are often offered by banks and build-ing societies and are essentially tax-free savings accounts. Interest is paid regularly, and your money is guaranteed not to reduce in value. Cash investments may seem to have no risk, but risk is still present, as the real value of cash erodes with inflation. This is particularly true when interest rates are low. This means cash earns a return that is inadequate to counteract inflation and can dramatically affect your spend-ing power over a number of years.

Therefore, once you have saved enough cash for those predictable and unpredictable “rainy days” you may want to consider riskier, but potentially higher- return, investments. That is where the second type of ISA comes in, the Stocks and Shares ISA.

Stocks and Shares ISAs

If you are looking for potentially higher returns, and understand the risks involved, you may want to invest in a Stocks and Shares ISA. You can invest in a wide range of assets, including shares, funds (which include authorised unit trust and open-ended investment companies) investment trusts, bonds and gilts.

A stocks and shares ISA gives you control over your investments and allows you to pick the assets you want to invest in and when you want to invest in them.

NB. ISAs are due to change in July 2014 following this year’s budget announcement. Interactive Investor will offer the NISA and allowances will be increased to up to £15,000 per year.

What are the benefits of an ISA

3Interactive Investor ISA

Tax Efficiency

The benefit of investing within an ISA

Some investors look at the return on an ISA or at how much they can invest in one year, and fail to see the value, but they would be wise to consider the longer term view. Those who have invested each year for a number of years have been able to create six-figure portfolios on which they do not have to pay any further income or capital gains tax or list on their tax assessment. By securing such a significant sum within an ISA wrapper each year as far as you’re able, you can build up a flexible tax-efficient investment.

For example:

A 50-year-old basic-rate taxpayer who placed £11,520 (the current annual ISA allowance) into a UK equity fund each tax year, assuming an annual total return of 5 per cent per year before charges, would have amassed over £260k by age 65. If this amount was withdrawn and was not in an ISA, the Capital Gains Tax (CGT) due – assuming no other capital gains - would be around £20k (18% lower band cgt and 28% upper band).

If this investment was wrapped in an ISA it would be exempt of income and capital gains tax, therefore you would not need to pay the £20k.

There is however a 10 per cent tax on dividends within a stocks and shares ISA. An exception to this dividend rule is with fixed-interest investments such as corporate bonds and gilts. As the income is derived from interest rather than from dividends, it’s tax-free in exactly the same way as interest from a Cash ISA. For higher-rate taxpayers there’s still a tax saving on dividends, however basic rate taxpayers pay exactly the same tax on dividends as they would if they’d held the investment outside the ISA wrapper.

If you’re currently a basic-rate tax payer, and become a higher-rate tax payer in the future, the tax benefits on dividends will apply to any existing investments you’ve built up and still hold within an ISA which is another benefit of investing in an ISA earlier, rather than later.By securing such a significant sum

within an ISA wrapper each year

as far as you’re able, you can build

up a flexible tax-efficient investment.

What are the benefits of an ISA


Investing for income

ISAs can be used as a way to generate non-taxable income, which may be of particular interest to people who have retired. In the case of bond funds held within ISAs, managers can reclaim the 20% tax deducted from interest payments, so the income is paid tax free. The 10% tax credit on dividends cannot be reclaimed.

Another major advantage of income from an ISA is it does not count against the age allowance, helping to protect investors against falling into the ‘age allowance trap’.

The flexibility of ISAs in allowing penalty-free capital withdrawals means they also compare favourably with pensions. As with any investment strategy, ISA investors who need income should ensure they have a balanced portfolio with their investments spread across different asset classes, including cash, bonds and equities.

There are various ways in which ISA investors can tap into equity income. Existing holders of Cash ISAs can also switch their savings into equities, although there are no guarantees with shares, and cash savers should consider the risks carefully.

ISAs are popular

with income seekers,

especially at retirement.



A Stocks and Shares ISA is a name that has traditionally been used to differentiate between a Cash ISA and one where you can invest in a variety of investments.

Nowadays you can hold much more than shares within a Stocks and Shares ISA.

Shares remain a popular investment choice thanks to their potential for returns, and their opportunity to invest directly in individual companies.

A share is an investment in an individual company. Buying even one share gives you part ownership of that company. This entitles you to benefits including receiving dividends and registering your votes in company activities such as annual general meetings.

Interactive Investor lets you buy shares and funds from UK and international Indices.

UK Indices include FTSE 100 and 250 as well as AIM. AIM typically caters for smaller shares which can be more volatile. This means that there is potential for higher returns as well as higher losses. Since August 2013, it has been possible to add AIM stocks to an ISA. From April 2014, there will be no stamp duty on Aim Stocks.

Essentially, the term fund refers to an investment where private investors pool their money so it can be invested in a number of different companies or enterprises. Funds can include investments such as a unit trust or an open-ended investment company (OEIC). Investing in this way helps investors spread their risk. It also means their investment is managed by a professional fund manager and reduces their dealing costs (as they avoid paying individual dealing costs on a large number of investments).

Some novice investors find investing in a fund-of-funds or a multi-manager fund a useful starting point, as this single fund invests in a range of others, thus spreading risk across an even greater set of investments.

Funds

Indicies

Shares



Looking beyond Stocks and Shares

A bond investment is where you lend money to the issuer for a fixed period, in return for a fixed rate of interest.

The risk involved in government bonds depends on the issuer and on how long the bonds have to run to maturity. The shorter the time a bond has to maturity, the closer it is to cash in terms of its risk profile. Longer-dated bonds are more volatile.

Riskier than government bonds, the value of corporate bonds depends on: the quality and credit rating of the issuer, the time to run to maturity, inflation and the likely trend in interest rates, and where the bond stands in the pecking order for repayment in the event of a corporate failure.

ETFs are a form of collective investment that can be bought and sold like shares. All ETFs are designed to track an index, which could be anything from the well-known such as the FTSE 100 to the exotic.

There are many similarities between investment trusts and their more popular cousins, unit trusts. Both are collective investments where investors’ money is pooled and used to buy a portfolio of stocks or shares, which is professionally managed on their behalf.

Corporate Bonds

ETFs

Unit Trusts and Investment Trusts

Government Bonds

Bonds



What to consider when choosing investments:

Risk level

Some investments carry more risk due to the sector, economy, location and your personal circumstances.

With potential risk comes potential reward, so you’ll need to decide the level of risk you’re comfortable with. Generally speaking, the longer term the investment, the higher the appetite for risk, as you have a longer period over which to smooth out any market fluctuations.

Sector

Sectors include areas such as pharmaceuticals, property and banking. Each carries its own risk levels, as well as positive and negative attributes. Having a personal knowledge of and interest in a sector can be an advantage as you’re likely to keep more informed about it.

Geographical region

Do you want to invest in UK or overseas markets? Are you interested in new or established emerging markets? Different overseas markets will carry different levels of risk depending on their particular social, economic and political factors.

Income or growth

Some investments will have a primary focus on providing income (paid out as dividends to investors) or capital growth through additional value as the price of your investments rise.

You may have an income or growth priority already or this might change over time. You can alter your portfolio to suit your individual requirements at any time.

Transferring Cash ISAs into Stocks and Shares ISAs

You can now transfer money held in a Cash ISA into a Stocks and Shares ISA. This will allow you to start your savings in a Cash ISA and then roll them over into Stocks and Shares ISAs when you’ve built up a larger fund and are happy to take the risk of investing in the stockmarket.


Interactive Investor ISA

The importance of making a good decision by Justin Modray of Candid Money

Investment platforms have been a boon for many investors, including me, by helping to reduce costs and paperwork when buying funds. And they can be especially useful for ISAs, by allowing you to combine shares (including investment trusts and exchange traded funds) and a very wide range of investments funds within your allowance. But there are potential drawbacks too. And since choosing an expensive platform over the cheapest could end up costing you hundreds or even thousands of pounds extra over time, making a good decision is very important.

If you have not yet used a platform, should you? And, if you already do, are you paying too much?

There is a lot to consider, but I hope the points I cover over the next few pages will help you make a good, informed, decision.

Justin Modray

the founder of www.candidmoney.com. A totally independent, free and impartial financial website.

8



What are investment platforms?

Investment platforms, also referred to as fund supermarkets or ‘wraps’, allow you to combine shares with funds from a variety of fund managers in one place. This makes holding and trading a wide range of funds very straightforward, especially within Individual Savings Accounts (ISAs) and pensions.

The pros and cons of using investment platforms for ISAs

This seems an obvious place to start. After all, if you don’t believe the potential benefits outweigh the possible drawbacks there is no need to read further.

How safe are platforms?

Your investments are held separately from the platform in a ‘nominee’ company, safeguarding them should the platform go bust. The worst case(albeit very unlikely) scenario would be if monies were illegally taken from the nominee company and the platform could not afford to cover the loss, in which case Financial Services Compensation Scheme (FSCS) cover of up to £50,000 per person per platform would apply. Underlying investments and cash are also individually covered by the FSCS as normal, that is up to £50,000 and £85,000 respectively should an underlying fund provider or bank default.

Investment platforms make holding

and trading a wide range of funds,

very straightforward, especially

within Individual Savings Accounts

(ISAs) and pensions.

Benefits Drawbacks

4 Can be the cheapest way to buy funds 8 Charges sometimes high, depending on platform

4 Allows you to mix a wide range of investments within a shares ISA 8 Charges can be confusing

4 Reduces administration and paperwork 8 Financial Services Compensation Scheme cover capped at £50,000

4 Makes switching between funds simpler and quicker 8 You may be charged to re-invest fund income

4 Easier to monitor your investments when held in one place

8 Charges when closing an account or transferring to another platform sometimes steep

4 Tools can help monitor and analyse your portfolio



Understanding how platforms charge

Given all regulated platforms must adhere to the same financial security standards and the majority deliver more or less the same service (give or take the odd bell or whistle) then what really matters is cost. And cost can be a confusing subject, since there are a variety of ways platforms might try to charge you.

Cost can be a confusing subject

since there are a variety of ways

platforms might try to charge you.

1.70

% O

ngoi

ng C

harg

e

0.75%

0.75%

0.2%

Platform You

Other

Platform Comission

Fund Manager

REBATE



Let’s start with the basics.

You can pay for platforms in one of two ways: Either directly (the only option for shares) or via annual charges on the funds you own).

Rule changes mean that from 6 April 2014 all platforms available to the public (some are via financial advisers only) must charge directly for new investments. But since payment via funds can continue for existing investments until April 2016 it’s important to grasp both concepts.

Dirty Funds

Annual fund charges include commissions and fees paid to investment platforms, which pushes up total annual fund costs, called the ‘ongoing charge’.

Paying via fund charges

Platforms paid via funds use more expensive ‘dirty’ fund versions which include commissions and fees within their charges. A platform might rebate some of the commissions and fees to you, so it’s still possible to get a good deal, but it can be hard to decipher the relative fee split between the fund manager and platform.

Paying Direct

When paying directly platforms use lower cost funds without sales commissions built into charges, so-called ‘clean’ funds (see the breakout box for more details). This doesn’t guarantee you a cheaper overall deal, but does make it easier to see how much you are paying the fund manager and platform for their services.

0.75%

0.2% ANNUAL FEE

Platform You

0.95

% O

ngoi

ng C

harg

e

Other

Fund Manager

Clean FundsAnnual fund charges exclude these payments, which you make directly to the platform. The annual fund ongoing charge is therefore lower.



How much do platforms charge?

When paid via fund charges platforms normally levy an annual percentage fee on the value of your investments. When paid directly most still charge a percentage fee (which may or may not apply to shares), although a few instead levy a fixed annual fee.

The amount you end up paying can range from a few pounds to over a thousand pounds a year, largely depending on whether the platform charges percentage or fixed fees, the amount you invest and how often you will switch funds and/or trade shares.

Percentage versus fixed fees

Understanding the difference between percentage and fixed fees is really important, as it can have a big impact on how much you pay, as the example below highlights. Let’s assume platform A charges 0.35% a year (on both funds and shares) and platform B charges £100 a year:

It’s clear that percentage fees favour smaller investments and fixed fees can prove significantly cheaper on larger investments. But in practice it’s a bit more complicated as platforms with fixed annual fees normally charge dealing fees when you buy and sell funds, whereas those with percentage fees usually don’t.

Taking account of fund dealing fees

Let’s look at the impact of fund dealing fees on our example, assuming platform B charges £10 a deal and you place 5, 10 and 25 deals a year (switching a fund counts as 2 deals):

The fixed fee platform is still likely to come out cheaper for larger sums, but the saving may be diminished or even wiped out if you switch funds very frequently. So if you are likely to fall into this category it’s an important consideration. Since both platform types normally charge share dealing fees you will need to factor in these too if relevant.

PlatformTotal annual cost of using platform for sum invested

£1,000 £15,000 £40,000 £75,000 £150,000

A £3.50 £52.50 £140 £262.50 £525

B £100 £100 £100 £100 £100

PlatformTotal annual cost of using platform for sum invested

£1,000 £15,000 £40,000 £75,000 £150,000

A £3.50 £52.50 £140 £262.50 £525

B £100 £100 £100 £100 £100

B – 5 deals £150 £150 £150 £150 £150

B – 10 deals £200 £200 £200 £200 £200

B – 25 deals £350 £350 £350 £350 £350



Fund charges

When using clean fund versions annual fund charges are largely standardised across all platforms, although a few may be cheaper on some platforms than others. But when using dirty funds the fund charge, net of any platform commission rebate, is very important, as this is the only way you can accurately compare how much the platform costs since it doesn’t charge you an explicit platform fee. Comparing costs via the clean and dirty routes requires a spot of arithmetic along the following lines:

In this example the total annual cost is the same, but in practice it may well be different, for better or worse. And, of course, when buying funds after 6 April 2014 the commission rebate option will not be available in any case.

Other platform charges to watch out for

While the costs outlined above will likely contribute the most to how much you pay, the following are also worth watching out for:

Can you avoid platform fees by buying direct from fund managers?

Yes, if the fund manager sells direct (an increasing number don’t these days) but expect to be sold dirty rather than clean fund versions. So it could end up costing you more than using a platform.

Total cost – platform with clean fund Total cost – platform with dirty fund

Annual fund charge 0.75% Annual fund charge 1.50%

Annual platform charge 0.25% Annual platform rebate -0.50%

Total annual charge 1.00% Total annual charge 1.00%

Exit / transfer charges It’s unlikely you’ll remain with the same platform for the rest of your life, so check how much it’ll cost to leave. This could include fees to both close your account and transfer to another platform. If you want to transfer your investments ‘as is’ most platforms will charge you per fund, although the extent of the charge varies widely.

Paper statements It’s becoming more common to charge extra for paper statements, so factor this in if important to you.



How much are you paying?The next logical step is to calculate how much a platform (either existing or one you’re considering) will cost you. This handy table should help you:

You might find it easier to use my www.comparefundplatforms.com website to run an automatic comparison between leading platforms for the funds you hold.

Should you transfer your existing ISA(s) to another platform?

If you can save a worthwhile sum of money (net of any exit/transfer fees) and are confident the cheaper platform will meet your needs then there is little reason not to transfer.

You just need to decide whether to transfer your investments as cash or ‘as is’ (technically called an ‘in-specie’ transfer). Transferring cash can be cheaper but means your money may be ‘out of the market’ for up to a week or more during the transfer process, so you may gain or lose from any market movements during that time. Transferring ‘as is’ removes this risk but can be costly if your existing platform charges a hefty fee per fund transferred.

Checklist

I hope you’ve found my brief guide helpful. To sum up, here’s a checklist of points to consider when choosing a platform:

• Are the investments you wish to hold available?

• Calculate the total annual cost, including fund charges

• Remember to factor in dealing costs, if applicable

• Check how much it would cost to transfer to another platform in future

• If you want portfolio analysis tools are they available?

• If you want to use a platform’s fund research, gauge whether it is impartial or commercially driven

• Call the platform for a chat to get a feel for customer service, are they friendly and helpful?

Charge Amount Note

Annual platform charge (if explicit)

£ if percentage multiply by amount invested

Average annual fund charge

£ multiply percentage by amount invested, deduct platform rebate if applicable

Dealing costs £ Cost per fund/share deal multiplied by expected number of deals a year (1 fund/share switch = 2 deals)

Other charges £

Total Annual Cost £



About Justin Modray

Candid Money

Compare Fund Platforms

Candid Financial Advice

Justin is a prominent personal finance commentator who runs the popular Candid Money and Compare Fund Platform websites along with a low cost independent financial advice service.

candidmoney.com comparefundplatforms.com candidfinancialadvice.com

Extensive, impartial, guidance for private investors.

Compare fund platform costs based on the funds you own.

High quality independent financial advice for a fraction of the usual cost.




We believe investing should be straightforward. That is why we offer an ISA service that’s fair and square and provides everything you need to take control of your investments in confidence.

Our ISA includes:

No percentage charges on your investments

Our £20 quarterly fee gives you two free £10 trades and there are no extra charges to hold an ISA. After that trades are just £10. Our flat fee means that we don’t charge you extra as your investment grows, and you know exactly what fees you will pay at the outset.

£5 Frequent Trader Rate

If you are a frequent trader, our flat fees are even lower. Trade 10 times in a month and any trades after that are just £5.

A world of investments to choose from

UK and International Shares, Funds, ETFs, Bonds, Gilts,. We offer a full range of clean funds and what’s more, we provide a full rebate on any commissions we receive if you invest in “dirty funds”.

Regular Investment Plan

If you would prefer to build your ISA portfolio over an extended period, you can set up a regular investment plan. You’ll pay a low £1.50 charge to buy investments and you can opt to buy the same, or different, investments at the same time each month.



UK Helpdesk and one-to-one service

Our UK-based helpdesk is open Monday to Friday 7.45am – 9pm. Our one-to-one telephone seminars give you an introduction to our trading platform, products and services to help build your investing confidence.

Ready-made selections.

If you are just starting to invest, looking for a quick start or some last minute ideas for your ISA, you may be interested in our ready-made selections.

Our ready-made fund selections each hold four separate funds, all of which beat their benchmark over three and five years.

Ready-made fund selections give you access to a number of investments all for one flat fee of £10, saving you money on execution.

No hidden extras

We charge the same flat fee whether you trade online, on the phone, on our apps or on UK or International markets. £10 on our standard tariff or £5 for frequent traders.

Impartial Research and Tools

Interactive Investor was one of the first online independent providers of financial research and tools. We are also home to one of the UK’s most active investing communities where people come together to share investment ideas and information. None of our research or information is produced to steer you towards commercially beneficial investments. Because of our straightforward pricing – we don’t benefit more, or less, from you investing in one asset over another.

Invest on the go

Our range of iOS and Android apps mean that you can trade from your tablet or mobile phone as well as from your desktop. There are no additional charges to use mobile devices.

For more information on our fair and square ISA service, or to open an account visit iii.co.uk/isa

Please be aware of the risks involved. The value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. Past performance is no guarantee of future performance. Tax treatment depends on your individual circumstances and may be subject to change. If in any doubt, please seek advice.

Interactive Investor Trading Ltd is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange.

Registered Office: 1st Floor Standon House 21 Mansell Street London E1 8AA.

Registered in England with Company Registration number 03699618.

iii.co.uk

interactive investor isa guide

Documents

cash investments

types of isa

type of isa

cash isas cash isas

shares isasif

real value of cash

tax year

investments dont