Break the ISA with a self-select plan

When choosing an ISA, don't be bound by the unit versus investment dilemma, make your own mix to match your budget, ethics and risk.

Most people will be using their individual savings account (ISA) allowance to invest tax-free in stocks and shares using a unit trust or investment trust. But more serious investors may find a more proactive way of choosing their ISA is through a self-select plan. These are bought through stockbrokers and give you much greater freedom to invest in a mixture of equities, including ordinary shares, corporate bonds and gilts, as well as unit trusts and investment trusts. Wealthier investors use self-select ISAs to protect part of their portfolio from the taxman. They are particularly useful for holding shares paying generous levels of income, or that are likely to shoot up in value.

Most people will be using their individual savings account (ISA) allowance to invest tax-free in stocks and shares using a unit trust or investment trust. But more serious investors may find a more proactive way of choosing their ISA is through a self-select plan. These are bought through stockbrokers and give you much greater freedom to invest in a mixture of equities, including ordinary shares, corporate bonds and gilts, as well as unit trusts and investment trusts. Wealthier investors use self-select ISAs to protect part of their portfolio from the taxman. They are particularly useful for holding shares paying generous levels of income, or that are likely to shoot up in value.

"These are definitely for the more serious investor," says Sue Whitbread, associate director of Chartwell Investment Management. "You can choose from the full range of qualifying funds to put together your portfolio. This could prove very difficult for inexperienced investors."

With most self-select ISAs the provider offers the basic plan framework and handles the administration and dealing. The rest is up to you. This gives you the freedom to make your own investment decisions according to personal criteria such as risk, ethics and budget. But if your chosen shares go belly up, you have nobody to blame but yourself.

If you are not totally confident in your own stock picking skills you can buy an advisory self-select ISA where a manager gives advice on what to buy and sell. The final decision will still be yours. Charges will be higher for an advisory service than for pure self-select ISAs. Some companies, including Chartwell, provide a self-select ISA on what is called a discretionary basis - the manager buys and sells the shares and trusts on your behalf. You have no input on the individual deals.

"The advantage is that you can build up a fund with maximum diversification, rather than being restricted each year to funds offered by a single manager," says Whitbread. The Chartwell plan has a dealing charge of 0.5% with a £30 minimum, and an annual management charge of 1.25%. Doing all the buying and selling yourself can get expensive. If you plan to set up a self-select ISA, you should compare charges carefully.

A handful of stockbrokers impose initial charges, but most charge an annual management fee for the ISA administration plus dealing charges. ISA management charges range from 0.5% to 1%, so charges mount as your portfolio grows. In time these may reduce the benefits of using a self-select ISA.

As with all ISAs, the main benefit is that you pay no income tax or capital gains tax on your investments. This is of greatest benefit to wealthy investors who may easily exceed their annual capital gains tax allowance, currently £7,100.

But if your capital gain from shares remains below that annual threshold, you will pay no further tax even on shares held outside an ISA. So it may not be worth paying the extra ISA administration charges.

Dealing charges on self-select ISAs vary from between 0.5% and 2%, falling the greater the amount you trade. The typical minimum charge is £15, while the maximum will range from £40 to £150.

NatWest Stockbrokers charges an annual administration fee of 0.5% on the first £20,000 under management within its self-select ISA, which falls to 0.4% for the next £20,000 and 0.3% thereafter, with a maximum charge of £275.

Trading costs on the plan are 1.25% per deal, with a minimum charge of £15 and maximum of £150.

You should examine stockbroker charges to find a structure that suits the way you plan to use your self-select ISA. "If you will be making a lot of changes to your portfolio, it is better to pay a reasonably high annual management charge in return for lower dealing costs," says Peter Hargreaves, chief executive of Hargreaves Lansdown. "If you will not be making so many changes then look for a low annual fee."

Hargreaves Lansdown offers an execution-only self-select ISA, including internet dealing. It has no annual management fee, and no charges for buying unit trusts. Share dealing charges are 0.5% with a £15 minimum per trade.

Hargreaves says money going into self-select ISAs is currently heading all one way. "There are only three popular ISAs this year -- technology, technology and technology. Everything else pales into insignificance."

Self-select ISA investors are both investing in individual companies and pooled technology funds such as Aberdeen Technology, Jupiter Technology and Framlington NetNet.

Elissa Bayer, head of London private clients at Greig Middleton, says investors in self-select ISAs are more willing to take investment risks than those who previously invested in PEPs. Again, technology is the driving force. "If you are lucky to double your money your £7,000 allowance will be worth £14,000, which can start to look quite attractive."

A final word of warning: if you are hoping to set up a self-select ISA this year, start as soon as possible, says Sue Whitbread.

"Stockbrokers and ISA managers do not make a lot of money from self-select ISAs. Your call goes to the back of the queue. Many people can wait on the telephone for up to 40 minutes just to get hold of a dealer. You can end up tearing your hair out," she says.

The charge for technology has compounded the problem. "Stockbrokers are being swamped. You have to ask yourself whether there is time to set up a self-select ISA before 5 April."