Choosing investments for your Isa will come down to your personal circumstances and your risk appetite. This may seem like the trickiest decision. But once you have chosen your Isa investments you need to work out the best place to buy them. And here the DIY investor has to navigate a minefield of different types of Isa providers. What you really want it to buy your investment as cheaply as possible, but the industry lacks transparency over charges.
1. Choosing stocks and shares direct
Investors who choose to buy stocks and shares direct for their Isa have a simpler playing field than investors who want to hold Isa funds. If you will be buying and selling stocks and shares for your Isa, you need a self-select Isa, offered by a range of stockbrokers.
With a self-select Isa there will be two layers of charges. There will be one fee for the overall Isa wrapper (usually charged on an annual basis) and a second set of dealing fees incurred every time you buy or sell. To work out which self-select Isa provider is best for you, you need to work out what kind of investor you are. Do you intend to buy and hold your stocks for several years? Or will you be trading on a monthly or weekly basis? If you are not going to trade often, then keeping the annual Isa fee down may be more important. However, if you are a frequent trader then you will benefit from low dealing fees.
2. How to buy Isa funds
When it comes to Isa funds, it doesn't make sense to buy direct from the fund provider. Since 1 January 2013, a new regime has existed for the sales of funds. Under this new regime, called the Retail Distribution Review (RDR), independent financial advisers have to charge an upfront fee for any advice given. They are no longer able to be paid via commission on products such as investment funds.
This means that fund providers have issued new types of 'clean' funds, that are free of the commissions element earmarked to pay financial advisers. However, some funds providers don't want to deal directly with investors who are doing it by themselves without the help of an adviser and therefore won't let you access the 'clean' share classes. And while a handful of providers will allow you to access the 'clean' share classes, this may still not be the best way to buy your funds.
If you are going to buy a range of funds from different providers, whether within this year's Isa subscription or over a period of several years, it makes sense to hold them together on a fund platform. These fund platforms are not really products, they are services that enable investors to buy and often hold their investments online all in one place, with a degree of flexibility to switch investments around as their lives change without having to keep paying high charges for buying and selling them. Not only can this save on costs, it can also make the administration of your funds easier. You can also use discount brokers that give cheap deals on a range of investment funds.
However, the distinction between fund platforms and discount brokers is becoming increasingly blurred. Some platforms offer a direct to public service with either commission rebates or reduced charge funds, which is a similar end result to investing on other platforms through some discount brokers. And some discount brokers also now offer their own bespoke platforms.
Fund platforms may offer some of the old commission-based share classes and/or the new clean fund share classes. On the commission-based share classes, a platform will typically rebate some or all of the trail commissions (the annual commissions earmarked to pay advisers over the lifetime of the investment, which can be up to 1.5 per cent) and waive some or all of the initial fee on the fund, which can be up to 5 per cent.
With a platform that waives the initial fee and rebates all the commission it may be more cost-effective to buy the old-style commission-based funds share classes.
From a total cost perspective, buying the commission-paying share classes could be better value, because clean share classes plus a platform fee are likely to incur an element of value-added tax. However, this depends on the level of the platform fee. Commission-paying share classes where the platform rebates the commission do not incur any VAT.
Bear in mind that this is a fast-changing market and new platform regulations are expected by the end of 2013. In anticipation, some platforms have already moved to providing the new commission-free 'clean' share classes. These include TD Direct, Alliance Trust Savings and Interactive Investor.
Meanwhile, one fund platform - www.rplan.co.uk - is attempting to help investors make sense of prices by comparing prices across 36 platforms and discount brokers (including itself) on a typical basket of Isa funds for different investor profiles. The cheapest platforms on this basis are (in order of cheapness) Saxo Bank, Cavendish Online, TD Direct Investing, ICICI Bank, RPlan and Club Finance.
A company called www.comparefundplatforms.co.uk enables you to input specific funds and find the cheapest platform on which to buy them. This tool, however, omits some key players, notably, industry leader Hargreaves Lansdown. While Hargreaves Lansdown scores highly on its customer service and financial strength, it is not necessarily the cheapest place to buy funds. On the other hand, cost may not be as important to you as those other factors. Plus Hargreaves has said that it will move all its clients over to clean fee share classes to meet regulatory changes.
3. Watch out for deals
Many fund providers do deals in Isa season that can make their standard charges cheaper for a limited period.
Fidelity currently has a half-price Isa deal. The offer is open to direct investors depositing a lump sum or setting up a new monthly savings plan investment into a 2012-13 or 2013-14 Fidelity Isa between 18 February and 5 April 2013.
The half-price offer will be achieved through a cash rebate, which will be calculated as 50 per cent of the value of the annual management charge of the funds you initially invest into. But that will last only for the first year. For example, if you invest £6,000 into a fund with an annual management charge of 1.5 per cent, the cash rebate for the 12-month period will be £45.
4. What do you do if you think you are being charged too much on your Isa?
You can move to another stockbroker or fund platform. However, the Financial Services Authority (FSA) has made it compulsory for fund platforms to allow re-registration of funds from other fund platforms into their own. This enables the administration of your funds to be 'transferred' without the need to sell or buy back any element of your holdings and at the same time allow them to retain their 'tax status'. This avoids additional charges and the potential risks of being 'out of the market' as a result of having to sell your original holdings as part of the transfer process.
If you hold funds directly with a fund manager you can also carry out this process. In the majority of cases you will not incur exit charges from your existing provider. However, you might face fees to close an account and more fees for each investment you want to transfer across.
Cavendish Online allows re-registration. If you have an Isa worth £10,000 or more, TD Direct will pay you from £75 to £1,000 cash back on a transfer in. All you need to do to take part in this offer is arrange a transfer request in the qualifying period - 15 February to 12 April 2013 - and the transferred Isa(s) must have a combined stock and cash value of £10,000 or more.
The cheapest fund platforms
■ Cavendish Online refunds all ongoing commission. Cavendish will retain a small proportion of the total annual charge, equivalent to £5.64 a year for an Isa valued at £11,280 (annual limit). www.cavendishonline.co.uk.
■ ClubFinance offers 75 per cent rebate on the ongoing commission. http://www.clubfinance.co.uk.
■ ICICI Bank refunds all trail commission, and charge a £4 a month (or £35 a year) fixed fee. www.icicibank.co.uk.
■ Rplan refunds 50 per cent of any trail commission, and cap what it receives at £5 a month. http://www.rplan.co.uk.
■ Saxo Bank, via its Saxo Modern Wealth Management platform, has a £35 annual Isa charge, and rebates all commission until 1 January 2014 (at which point it will charge 0.5 per cent a year). www.modernwealthmanagement.co.uk.
■ TD Direct Investing refunds all ongoing commission, but will be introducing a 0.35 per cent platform charge in August 2013. TD Direct also has an account charge of £30 plus VAT for balances less than £5,100 for Isas only. www.tddirectinvesting.co.uk.
How self-select Isa providers compare
| Self select Isa provider | Isa fee | Share dealing fees |
|---|---|---|
| Alliance Trust Savings | All accounts have a quarterly administration charge of £10 + VAT | Standard dealing charge is £12.50 but can drop as low as £6.25 per deal dependent on the number of Alliance Trust Shares held. |
| Barclays Stockbrokers Limited | No account charge for only funds held in Isa. Where other investment types are held charges are £30 per annum +VAT for portfolio valule of £7,500 or less, and £50 per annum +VAT for portfolio value of more than £7,500. | Online dealing charges are £12.95, £9.95 or £6.95 depending on how frequently you trade |
| Charles Stanley Direct | No Isa account fee | Share trading at £10 per trade. 0.25% per year for holding shares (max £150). |
| First Direct Sharedealing | No registration fee or annual management charge | Online UK equities dealing charge is £11, telephone charge is £25. Frequent trading is £9. |
| Halifax | Flat-rate annual administration charge of just £12.50 | Online trades for £11.95, scheduled regular investments for £2 commission. |
| Hargreaves Lansdown | Annual charge to hold shares is 0.5 per cent (capped at a maximum of £45 per annum). | Dealing charges are £11.95 (0 - 9 deals per month), £8.95 (10-19 deals per month) or £5.95 (20 or more deals per month) |
| iDealing | £5 quarterly admininstration charge | A basic commission charge of £9.90 per online trade for off-book LSE listed securities |
| Killik | From £5 plus VAT half yearly | UK equities and funds on first £15,000: 1.65% (or £30 minimum). On the balance: 0.5% |
| Lloyds TSB | Three levels of quarterly admininstration charge: 0.125% plus VAT, (subject to minimum £5.25 plus VAT or maximum £30 plus VAT) | Online trades £15 |
| NatWest Stockbrokers | Zero annual administration fee if £10,000 or more in account or have traded 4 or more times in previous year. For smaller accounts or less frequent traders there is an annual administration charge of £25 + VAT. | £15 for UK trades and £20 for international trades |
| Pilling & Co | No Isa account fee | 1.65% on the first £10,000, 0.50% on the next £90,000, 0.40% on the excess over £100,000. |
| Redmayne-Bentley | Annual administration charge is £60 + VAT. | Minimum commission is £17.50 (transaction values up to £1,060). 1.65 per cent on transaction values between £1,060 - £7,000, then 0.50% on the balance between £7,000 - £20,000 and 0.45% on the balance above £20,000. A 'Settlement and Compliance' charge of £7.50 is added to all transactions. |
| RBS Sharedealing | Annual administration fee of £25.00+ VAT. RBS will waive this fee if you have traded at least four or more times during the previous year. | Standard charge for UK equities is £15 per trade. There is also a Nominee account fee of £10+VAT per quarter. RBS will waive this fee if you have traded at least once or more during the previous quarter, or hold £2,000 or more in stock and/or cash in the account. |
| Selftrade | No Isa account fee | Online standard fee of £12.50 plus frequent trader fee of £6. A quarterly trading inactivity fee of £8.75 + VAT. |
| Share Centre | Admin fee of £12.50 + VAT per quarter | Standard dealing is 1% (min £7.50). |
| SharedealActive (Jarvis) | Isa administration fee of £50.00 per year | £9.50 fixed rate for online and telephone dealing. |
| Simplystockbroking | No Isa management fee | Flat £8 fee for online and telephone dealing. |
| TD Direct Investing | £30+VAT per year for Isas with a balance up to £500. £0 yearly account administration fee for ISAs with a balance of £5,100 or over | Standard dealing charge of £12.50, can drop to £8.95 for frequent traders or £5.95 for active traders. |
| X-O.co.uk | No Isa account fee | Dealing charge is £5.95 |
