Many investors face losing their £7,000 individual savings account (Isa) tax-free allowance this year because they are afraid of putting their cash in the uncertain stock markets. But one way round this could be to buy into the empty shell of a self-select Isa.
These arrangements allow you to keep your money in cash with a view to investing money in the markets when you feel the time is right. So the self-select option provides a useful alternative to buying an "off the peg" Isa from a fund management company, where customers have no say in investment strategy and their cash is normally piled into equities.
Within the Isa wrapper, investors can put their cash into a range of hand-picked investments, including individual company shares, collective funds and government and corporate bonds. As with any other Isa, returns are tax-free.
Do-it-yourself Isas can also provide the freedom to drip-feed money into the markets over the year. This helps smooth the fluctuations in prices because customers buy shares and units in funds when they are at different levels through the year. Investors also have the option of switching back to cash if the going looks like it is about to get rough again.
Self-select plans offer considerably more flexibility and control to choose the style and strategy of your investment portfolio than conventional Isas. This is why some advisers feel they are not for everyone. The breadth of choice and control available in self-select schemes mean investors might need to be more experienced before effectively becoming their own fund manager.
They ought to be confident they can make investment decisions competently, or risk doing more damage to their potential returns than putting their cash into an investment house Isa at what they believe is the wrong time.
Philippa Gee, of Torquil Clark, the Midlands independent financial adviser (IFA) and discount broker, says: "Self-select is for more sophisticated investors. If they are using it as a wrapper to invest directly in stocks and shares, as many will, they need to monitor the markets very closely. They also need plenty of research information on the companies they want to invest in." On the upside, if you are an experienced investor, Ms Gee says you have the chance of higher returns, as well as the freedom to switch your investment objectives without the hassle and charges involved in switching fund manager.
But other advisers do not believe you need to be a stock market whizz to benefit from self-select plans. Mark Dampier, of Hargreaves Lansdown, the West Country financial adviser and discount broker, says: "Investors can use the self-select shell to invest in a mixture of funds through a fund supermarket and get a consolidated statement breaking down the asset allocation within this portfolio.
"The advantage of this is that customers can easily tell if their investments in the wrapper are becoming unbalanced and then respond accordingly. If over the years you have Isas from different providers, each with their own statements, it is easy for the portfolio to become unbalanced without the investor realising this."
Mr Dampier also believes that in a few years, few investment companies will still be marketing their own Isas. Instead he expects they will simply provide the funds for the supermarkets, such as Fidelity's and Egg's offerings, for investors to mix and match.
If you are tempted by full-strength self-select with wide investment choice, providers include City Deal (www.citydeal.co.uk) and Redmayne Bentley (www.redmayne.co.uk). Generally speaking, charges can be broken down into annual fees and the dealing costs in buying and selling shares, plus stamp duty on those trades. You can also expect to pay for the company reports and other research resources you are likely to need. Annual fees are usually between about 0.5 per cent and 1.5 per cent, depending on the size of a portfolio.
Share-dealing costs are often determined by the level of service the investor requires. Brokers who provide advice are likely to cost more than execution-only services, where an investor makes personal choices without advice. Costs often vary between about £10 and £45 per trade.
'I get lowdown all on the one statement'
Karen Yearsely, a 29-year-old hospital doctor working in Newport, Monmouthshire, started investing through a self-select Isa three years ago.
She has used it to invest in 10 funds, including a UK income fund, a higher-risk technology fund and one investing in global emerging markets. So far, she has resisted investing directly in equities, but may consider buying individual company shares.
Karen finds having all her investment pots under one wrapper a convenient way of building up a balanced and diversified portfolio. It also gives her plenty of flexibility to vary the amount she invests.
She says: "I've got a mixture of funds from higher risk to lower risk and I can get the lowdown on all of them from one statement. I invest larger lump sums when I have the money, as well as regular monthly contributions."Reuse content