Investors deciding where to put money earmarked for their annual individual savings account (Isa) can absolve themselves of hard choices by farming out the decision to advisers. But others may choose a more hands-on approach.
Isas are easy to set up, and taking a “do-it-yourself” approach can bring benefits in cost and control, albeit alongside a bit more effort on the part of investors.
Holly Mackay, founder and chief executive of Boring Money, a financial website for consumers, says: “You’ll have to set up the account, invest the money yourself, monitor those investments and make any changes needed – so you just need to ensure you have some spare time to be able to do this.”
Investors choosing to do this will need to find a “self-invested” or DIY platform. Barclays, Santander and Vanguard are some of the most popular low-cost Isa platforms out there. But there are many others and investors will also need to decide whether to buy individual company shares, funds or a blend of investments.
Once investors have chosen the platform, setting up the account is simple. “You will be asked for your national insurance number as part of the process and it will be clearly signposted throughout that you have chosen an Isa,” says Jason Hollands, managing director of investing platform Bestinvest.
“Once you’ve opened the Isa, you do not need to do anything to make that money tax free. Investors are not even required to report Isas on annual self-assessment tax returns.”
Stocks and shares Isas can hold individual equities, gilts, bonds, investment funds and exchange-traded funds in a tax-efficient wrapper. But some people are wondering not just where they should invest their Isa but also whether to even utilise their allowance at all before the tax-year end, says Hollands.
“The public have been confronted with a combination of inflation eroding the real value of their savings, the prospect of a higher tax burden, and hikes to national insurance and dividend tax rates, and turbulent markets,” he says.
However, Hollands points out that the tax year-end deadline is simply the point at which an Isa allowance needs to be funded. “It does not mean you need to invest the cash, so one option is to secure the allowance with cash and invest it later when uncertainty and volatility has receded. This will ensure that a valuable long-term tax allowance is not forgone.” he adds.
The next step is to think about what you’re investing for. This will determine how much time you have to invest, the level of risk you’re willing to take and what type of Isa you need.
Laura Suter, head of personal finance at AJ Bell, says someone may be saving for retirement in Isas they don’t plan to touch for 30 years, while another may want to use their nest egg for a housing deposit or new car in five years. The two savings pots are likely to look very different.
“Generally, if you have a longer time horizon you could invest in higher-risk investments, as you’ll have longer to ride out the ups and downs of more volatile markets. Whereas if you know you’ll need the money sooner you might not want to risk that,” she says.
Another factor to consider is charges, both for your Isa provider and the costs of your funds. These can significantly eat into your returns over the long term.
“That doesn’t mean you should always pick the cheapest fund or provider,” says Suter. “You can pick a pricier option if you think it’s worth paying for and has the potential to deliver you more, but you need to weigh up costs as part of the decision.”
Then there are transaction or dealing costs to factor in. Each time anyone buys and sells an investment there is usually a charge, so doing it too often will eat into returns.
“This also means you need to think about how many investments held within a portfolio,” says Suter. “There’s no fixed rule, but if you’re just starting out in investing and your pot isn’t very large you don’t want to spend lots of money on buying lots of different investments.”
The arithmetic is self-evident: if you invested £1,000 and spent £50 on fees to buy funds, she says, you would need your portfolio to increase by more than 5 per cent just to get back to your starting fund. However, if you only spent £10 on fees, you just need the pot to rise by 1 per cent to get back to your initial investment.
For novice investors, ready-made portfolios allow you to select the kind of investor you are, before directing you to a portfolio of funds designed to be reasonable for most people with a similar appetite for risk.
Sarah Coles, senior personal finance analyst at investment broker Hargreaves Lansdown, says you could use a portfolio tool, where you put in your details and it suggests a handful of funds. You can then explore them to ensure you’re happy with them, and pick the investments you want. Alternatively, platforms have lists of funds they like, so if you know which sectors you want to invest in, you can start the process of exploring your options.
There are flaws with going it alone. Justin Modray, director at Candid Financial Advice, says the biggest risk is probably making ill-judged investment decisions, for example by taking inappropriate levels of risk or blindly buying recent top performers.
Mackay agrees but adds a second risk: “Not being sensible about your time frames and picking something too spicy for a three year window — or something too pedestrian for a 20-year window.”