As I want to go through things carefully, I’ve split all the details into several different parts, starting with thinking about yourself and what you want with the money, and moving into what there is available, and the nuts and bolts of products and investments. This is part 6 of the basic guide to Stocks and Shares ISAs.
Previously on the basic guide to Stocks and Shares ISAs:
- introduction – what is the basic guide to Stocks and Shares ISAs about
- part 1: all about you – why you want to invest, and how much money you have to play with
- part 2: all about risk – successful investing means always being able to sleep at night
- part 3: all about investments – what types of investments that you can put into ISAs
- part 4: all about asset allocation – how to decide which mix of investments is right for your ISA
- part 5: all about funds – narrowing down your choices
separating out funds and providers
The key to thinking about ISAs, is remembering that they are just containers. You want to pick the best investment that you can, and then put it into the cheapest container that you can. So the way to find the best ISA provider for you, is to pick your funds, and then find a cheap provider of them.
When your money is in the fund, it doesn’t matter who you bought it from it will return the same underlying performance. It’s just that a cheap provider will take out fewer fees so more of the performance will be returned to you.
the rules on Stocks and Shares ISA provider
Firstly, implications of one of the basic rules of ISAs. In any given tax year, you are only allowed one Stocks and Shares ISA from one provider (you may also have one Cash ISA from one provider). This means that you are restricted to using the investments available through the provider of your ISA.
Suppose you want to invest in the Legal and General UK FTSE All Share Tracker Index Fund and so open an ISA with Legal and General. If you want to invest in any other fund as part of your asset allocation, you have to invest with a fund offered by Legal and General. Fortunately, there are a couple of loopholes.
Firstly, there are funds supermarkets; these sound like what they are – a place where you can buy all sorts of investments that are offered by all sorts of companies. They also do Stocks and Shares ISAs, so if you open an ISA through a funds supermarket, you can pretty much invest in whatever you like. In addition to offering you more choice, they generally offer discounts on funds.
Generally, a fund may have an initial charge, and an annual management charge. Funds supermarkets generally discount both of these, often discounting the initial charge all the way to zero.
The typical fund in the UK has an annual management charge of 1.8%, so for every £100 held in the fund each year, £1.80 will go to the management company. There is usually no charge for holding an ISA with a funds supermarket.
stockbrokers and exchange traded funds
Exchange traded funds (ETFs) are a lot like regular funds, except that you buy and sell them like shares. Just as regular funds collect together everyone’s money and then invest it, so do ETFs, but because they float like shares their prices per unit can go up and down. This isn’t too important as there is a good market which naturally regulates the price, so for a long term buy and hold investor, this shouldn’t matter.
ETFs generally have very low fees typically around 0.4% annually, with no initial fee. However, you need to buy them from a stockbroker, who do have fees. These tend to start at about £10 per trade, plus stamp duty of 0.5%, so a £100 initial investment would cost approximately £10.50 in fees.
As you can imagine, if you want to use ETFs you need to minimise the number of separate transactions you make, so they are better suited to lump sum investments.
In my other life, I’m a spreadsheet queen, so I’ve created an interactive spreadsheet that’s all zipped up for you to download. If you don’t have a spreadsheet program on your computer, I recommend using Open Office, free and open source, my copy definitely opens this spreadsheet.
The spreadsheet compares two inexpensive funds supermarkets – Hargreaves Lansdown and Fidelity – and two inexpensive stockbrokers – TD Waterhouse and E*Trade. As far as possible I’ve used comparable funds which are the cheapest available from each provider, details of the funds are in the spreadsheet.
You can input your details into the pink boxes – you should have the amount and frequency that you want to invest, and your asset allocation. The spreadsheet is a little simplified, but it should be good enough for comparing costs (not performance).
Let me know if you have any problems, and I’ll see what I can do.
still to come…
Coming up in the basic guide to Stocks and Shares ISAs:
- conclusions – what’s been covered, and what to do next
- basic guide to Stocks and Shares ISA: conclusions
- basic guide to Stocks and Shares ISAs: introduction
- basic guide to Stocks and Shares ISAs part 1: all about you