Plunging markets may be deterring investors from buying stocks and shares Isas, but falling share values are not the only way you can lose out when investing your allowance. The onerous charges imposed by most funds can also eat into your pocket.
Isa investment funds sold by big-name fund managers such as Aberdeen, Fidelity, Invesco, Jupiter and Perpetual, carry charges that can take a major bite out of the money you invest. Most carry initial fees of up to 5.25 per cent which could eat up to £367.50 if you invest your full annual £7,000 allowance. They also impose annual fees of up to 1.5 per cent.
But if you are planning to buy a stocks and shares Isa before this year's 5 April deadline, you can save on most charges by purchasing your fund through a discount broker.
Discounts brokers rebate most of the initial charges on investment funds, providing you buy without financial advice on what is known as an "execution-only" basis. Selling without advice allows them to slash their overheads and pass on the savings to you.
They have proved hugely popular, but many Isa investors who could benefit are still unaware of the service they offer. Now some of the biggest discount brokers are embroiled in a major price war to boost their share of the Isa market. Savings available are more attractive than before.
Discounts on initial Isa fund charges vary according to broker and fund, but most cut initial charges to between 0.25-1 per cent. They make their money by selling in bulk and receiving a cut of the annual management charge as commission typically between 0.25-0.5 per cent. Financial Discounts Direct cuts initial charges on Aberdeen Technology's 4.25 per cent to 0.25 per cent, saving £280 on a £7,000 investment, and reduces Save & Prosper Premier Equity Growth's initial 5.5 per cent charge to 0.5 per cent, saving £350 on £7,000 invested.
But in January London-based discount brokers Bestinvest dropped all initial fund charges. It will even waive initial charges to zero on funds that pay no commission from annual charges.
Investors who are buying into biotechnology fund Framlington Health through Bestinvest will pay no initial charge, compared to 1 per cent through many rival discount brokers a saving of £70 for somebody investing their full £7,000 allowance. Website Virginmoney.com also sells Isas online without initial charges for a limited range of funds.
Around 3 per cent of the initial charge on investment funds is made up of commission to the financial adviser who recommends the fund. But if you buy direct from the Isa provider, you still pay the full amount, even though you have received no advice. The fund manager simply pockets the commission.
Mr Hollands argues that fund managers should sell their funds directly to investors without commission. But until then, investors who don't need financial advice should save money by buying through a discount broker.
Discounts are not only available on initial charges. A few are also rebating annual management charges. Although the discounts are much smaller, they can add up because you pay year after year, and as your investments grow, so does the cost of the charges.
Most brokers offer no rebates on annual charges, but Chartwell Asset Management returns 0.25 per cent of the annual management fee each year, says associate director Patrick Connelly. But instead of paying rebates, Chartwell sends investors a regular cheque.
Mr Connelly says that although rebates on annual charges can seem small at first somebody investing £7,000 would receive £17.50 in year one they will add up over time. However, although Chartwell also cuts initial charges to between 0-1 per cent, it makes them more expensive than Bestinvest and, unlike most discount brokers' charges, they levy a flat £20 fee on all Isa purchases.
Discount broker Cavendish Online also charges its online customers a fee £25 for those buying over the phone, £15 from a website. Director Ian Williams says it earns no money from the fund manager, returning all initial commission, although it cannot match Bestinvest's 0 per cent initial charge offer. It also waives all commission from annual fund charges.
Mark Dampier, head of research at discount brokers Hargreaves Lansdown, says accurately returning a proportion of annual commission is "virtually impossible". Instead, the discount broker gives those investing in its self-select Vantage Isa an annual "loyalty" payment of up to 0.375 per cent.
A self-select Isa allows you to combine cash, investment funds, bonds and individual stocks and shares within your annual allowance. Loyalty bonuses vary according to the fund manager, but are 0.25 per cent for Jupiter and Invesco funds, and 0.15 per cent for Credit Suisse. Investors can switch money around within the self-select Isa for no extra charge. Hargreaves Lansdown also cuts initial charges to between 0 per cent and 1 per cent.
Bestinvest 020-7321 0100 or www.bestinvest.co.uk; Cavendish Online 01225 471912 or www.cavendishonline.co.uk; Chartwell Asset Management 01225 446556; Financial Discounts Direct 0500 498477; Hargreaves Lansdown 0117 900 9000 or www.hargreaveslansdown.co.uk; Virgin www.virginmoney.com