There’s a wealth of financial products out there – here’s how to choose the right ISA
Investors have under three weeks left to exploit this tax year’s £20,000 tax-free Isa allowance. Most opt for safe cash Isas, but investment Isas, with the money going into stocks and shares, offer greater potential, though much greater risk.
Last year the average UK-invested fund has returned 4.4% – but over five years they average 44%. Money invested in European funds has grown 8% over the year and 60% over five years. Global emerging markets funds are up 14% over the past year and 37% over five years.
But those are the averages. If you had picked one of the most popular UK funds – Neil Woodford’s Equity Income fund – you are likely to be smarting at the 11.5% fall, and the gain of just 3.2% over three years – worse than cash Isas. Terry Smith’s popular Fundsmith Equity has had another great year, gaining 11% and giving investors an extraordinary 137% gain over five years.
So how do you go about choosing an investment Isa? Here’s your brief guide:
What are the tax benefits?
When you invest in Isas, your money is free from UK tax. So if your investments grow, you won’t have to pay capital gains tax – although even if you held a fund outside an Isa, you would still be able to make a gain of £11,300 without having to pay capital gains tax. There is also no tax on dividends paid by companies – although, again, everyone currently qualifies for £5,000 worth of dividends without tax. However, for the 2018-19 tax year, the dividend allowance will fall to £2,000, making Isas more attractive again if held for the long term. You don’t need to declare Isas on your tax return, simplifying your finances.
What should you invest in?
You can buy individual shares and put them in an Isa – such as Lloyds Bank shares, currently paying dividends worth around 4.5%. But most investors should opt for a fund, which is a basket of shares such as Lloyds and, typically, 50-60 other shares, to avoid the risk of any individual company going bust. These funds go under names such as “unit trusts” (the most common) and “investment trusts” (generally cheaper). Trouble is, there are thousands to pick from. But you don’t have to pick just one – you can mix, say, a UK fund with a European fund and a North American fund, for example. You can do this yourself – trustnet.com is a good place to gauge performance – or financial advisers, while costly, will pick them for you.
Currently the best-selling funds in the UK include Fundsmith Equity, JP Morgan Emerging Markets, Jupiter Income, First State Asia Focus, Lindsell Train Global Equity and Legg Mason Japan Equity. The most popular shares are BP, Lloyds, Legal & General, Shell, Vodafone and Glaxo. Popular investment trusts include F&C, Alliance, Scottish Mortgage and Monks.
An increasingly popular approach is to buy a “multi-asset fund” which mix shares, bonds and cash deposits, with Vanguard’s Life Strategy funds the big seller.
One choice concerns “active” or “passive” funds. Active funds employ a human (expensive) to trade shares. Passive funds are computer-run (cheap), and replicate an index, such as the FTSE 100.
Who do I use to invest?
If you are reasonably intelligent, investing is simpler than you think, saving a fortune in fees. You can buy direct from providers such as Vanguard, Fidelity and Fundsmith, with the fee based on the fund. Fundsmith Equity costs 1% a year, Vanguard’s are 0.15%.
But for most other funds, you generally have to go through a website, usually called a platform. There, you pick the shares or funds you want, and when you come to checkout, you pay a fee for the underlying fund, and a fee to the platform that adminsters them for you. Hargreaves Lansdown, Fidelity and Standard Life are big players. Cavendish Online is usually rated the cheapest, charging 0.25% on top of the fund charge, around 0.7-1% for active funds, but half that for passive funds. If investing under £10,000, other cheap providers include Rplan, AJ Bell, and Charles Stanley Direct, while iWeb from Halifax is cheap if investing larger sums.
What if I want advice?
You have two options: the “robo” advisers or the traditional financial advisers. “Robos” tend to create and manage simple portfolios at low cost, run online. Often they use cheap “exchange-traded funds” and “trackers” to cut costs. Names include Nutmeg, MoneyFarm, Wealthify and Evestor, which will set you up even for small sums, while Scaleable Capital and Investec Click and Invest start at over £10,000, and UBS SmartWealth from £15,000.
If you want full advice – only worth it if you have large sums– then locate an adviser at unbiased.co.uk. The standard advice? Ask friends and family for a trusted adviser.
Innovative ISAs: Risky? Perhaps
Adventurous investors are being offered the chance to earn returns of up to 15% with a new type of Isa. But this is very risky stuff – you could lose some – or all – of your money.
The “innovative finance” Isa is a new account for peer-to-peer lending, where borrowers are matched with investors. The latter can earn tax-free interest on their loans when held within the Isa “wrapper”.
Dozens of firms offer such Isas, which are also allowed to include debt-based crowdfunding. However, be aware that your capital is at risk, and these investments are not covered by the Financial Services Compensation Scheme.
One of those offering the highest returns is business lending platform Ablrate, which says its lender investors “are enjoying returns of 10-15%”. Meanwhile, the website of crowdfunding platform Crowd for Angels quotes rates of up to 12%.
Other firms floating these Isas include ethical investment platform Abundance – offering 8% a year – and Triodos Bank, between 5% and 7%.