Here are Money’s top tips for those intending to make their first foray into equity Isa investment
Investing for the first time can be daunting, but with cash saving rates at rock bottom, many savers are deciding to take some risks to achieve a decent return from Isas.
A good way to get access to the stock market is via a fund supermarket or stockbroker that can provide the Isa wrapper, then you just select what you want to go inside. Firms such as Fidelity, Hargreaves Lansdown, the Share Centre, Interactive Investor or iWeb all offer this service.
You can choose to buy individual shares or pooled funds that allow you to invest in a range of shares and other assets.
Most investment platforms levy an annual charge for use of the platform. If you buy funds, you will also be charged the fund’s own fee, but some platforms negotiate lower fees with some fund managers, which they can pass on to investors. If you buy individual shares, you will pay a dealing charge each time you buy and sell. For example, Hargreaves Lansdown typically charges a fee of 0.45% a year on investments worth up to £250,000. Investments between £250,000 and £1m incur a 0.25% charge, while those above £2m has no annual charge. There are separate share-dealing charges.
There are lower-cost platforms that have no annual charge. For example, iWeb, which is owned by Halifax, but it does levy a £5 fee each time you buy or sell a fund or share. There is also a £25 joining fee.
Investment platforms will allow you to open a stocks and shares Isa to make any income or gains free of tax.
You can invest up to £15,240 in one of these during this tax year, rising to £20,000 next tax year, which starts on April 6. Investments held in Isas roll up free of tax and income or capital taken out of them is also not taxable.
If you already have a cash or other type of Isa, the sum you have saved in it already this year will count towards your annual allowance. Within a stocks and shares Isa you can choose to invest in individual shares, funds, corporate bonds — IOUs issued by companies in return for a fixed rate of interest — or gilts (UK government bonds).
What about a pension?
You can also invest in a self-invested personal pension (Sipp), available from most asset managers, stock brokers and fund supermarket investment platforms. These plans are highly tax-efficient as the government adds tax relief to your contributions, boosting every £1,000 to £1,250 in the case of non and basic-rate taxpayers.
Higher-rate taxpayers (those paying 40% income tax) can claim up to a further £250 in tax relief via their self-assessment tax return at the end of the year.
As with Isas, the growth and dividend income within your Sipp investments roll up free from tax. Unlike Isas, however, when you draw money, which you can do from the age of 55, the first 25% is usually tax-free and the balance is subject to income tax.
Sipps can be held alongside a workplace pension. Opening an Isa or Sipp can be done online, over the phone, or by filling out a one-page form.
Once your savings are in a Sipp, you have similar investment choices to an Isa holder. You can stay in cash, but Sipps tend to be long-term products and investing in the stock market is likely to offer a better return.
How do I know what I am buying?
After registering, you can access a range of shares and managed funds. Most companies, including investment trusts (which are basically listed companies that make investments) have one type of share.
Listed companies are known by a short code or “ticker”. For example, Lloyds Banking Group is LLOY, Vodafone is VOD and Royal Dutch Shell is RDSA.
Investors in funds can face a dizzying array of “share classes” that are denominated by various letters, which you might feel are designed to confuse. A key difference is between a fund that distributes income and one that reinvests or accumulates the income.
Income funds will have “Inc” after the name of the fund and the accumulation versions will have “Acc”. So, if you want to receive the income from your fund, go for the Inc version. If you want the dividend income to be reinvested, choose the Acc version. The fund may also have a single letter after its name. This is because the platform has negotiated a specific deal with the fund manager. One platform may have an “A” class version of the fund costing 0.75% a year, but another will have the “B” class version costing 0.7%.
The letter “R” shows that it is a retail version of the fund — aimed at individual investors — and “I” indicates it is a version targeted at institutions. Individuals can invest in the institutional version if their platform allows, to benefit from lower charges.
Can I do it without advice?
A growing number of people are forgoing advice and making their own investment decisions.
If you want to conduct your own research about a fund, free information about performance and a fund’s top holdings is available on sites such as trustnet.com and morningstar.com.
Both Hargreaves Lansdown and Fidelity have lists — the Wealth 150 and Select lists respectively — of funds they recommend, based on their analysis of fund managers’ performance in recent years. These are free to view for all clients.
What if I want some advice?
You can use a financial adviser or “discretionary” manager to look after your Isa or Sipp for you. Some of the above platforms will offer this service, as do independent financial advice companies such as Chase de Vere, Brewin Dolphin and Charles Stanley.
A discretionary manager will take over your investments and make decisions for you, and is typically more expensive than using a financial adviser.
Nutmeg offers a lower-cost discretionary service by operating online and investing only in exchange-traded funds. These trade in the same way as shares, but investors track the performance of an index, such as the FTSE 100.
Some advice firms will charge up to 5% for initial advice, but then continue to levy a charge each time you invest money into your Isa even if you do not need any help in making an investment.
Also, watch out for firms that automatically charge an annual “advice” fee. It can be switched off, but you normally have to request it.