The birth of the ISA: A world of opportunity

ISAs have opened the door to a new range of investment options. By Tony Lyons

Welcome to the brave new world of Individual Savings Account (ISA), although it may take a while to get used to the changes from PEPs and Tessas. One of the main beneficiaries, however, will be equity-linked investments. Suddenly there has been a wholesale liberalisation of the rules, doing away with most of the restrictions on what you can buy.

With an ISA, the world is your oyster. No longer do you have to limit yourself to funds that invest over half their portfolios in the UK and the European Union if you want to maximise your allowances.

Specialist venture capital trusts, which have their own special tax advantages, are just about the only sector that cannot be included in an investment ISA. However, you will be able to invest in long-established investment trusts that buy into private companies, such as Foreign & Colonial Enterprise and Candover, just as you could with PEPs.

If you are a cautious investor, but still want the gains of the stock market, you are now allowed to invest through an ISA in investment trusts that trade in second-hand endowment with profits policies, which were disallowed for PEPs.

The biggest gainers from the change to ISAs could turn out to be investment trusts. Many of the giants such as Foreign & Colonial and the Alliance Trusts are general international funds. Because they fell foul of the rules and would not commit to having over half their funds investing in the EU, they did not qualify under PEPs, so investment in them was limited to pounds 1,500 a year.

The Association of Investment Trust Companies (AITC) is currently seeking its members' support for a pounds 27m marketing and advertising campaign for investment trusts.

"The new level playing field opened up by ISAs has been a major factor in this," says Annabel Brodie-Smith of the AITC. "We want to encourage more private investors, and the new freedom and flexibility that ISAs provide gives us our chance to show what we can offer."

Obviously, with their ability to borrow money, known as "gearing", and their freedom to buy back shares which may lead to a reduction in the average discount, investment trusts are a more sophisticated investment than unit trusts or open-ended investment companies (Oeics).

Because their prices are determined by supply and demand in the stock market, they can be more volatile. But for those prepared to take a long- term view, five years or longer, they can prove to be a rewarding investment.

But most unit trusts and Oeics will have the same charges for their ISA wrappers as they did with PEPs, many investment trust groups are planning a dual pricing scheme - one price if you buy through an Independent Financial Adviser (IFA), a lower price if you buy direct.

Because so many trusts were not fully qualifying, most did not pay any commission to IFAs, unlike unit trusts. With the latter, unless you dealt through a discount broker or a fee-charging IFA, the adviser would usually pocket 3 per cent initial commission plus 0.5 per cent for annual renewals.

"Our terms of business will basically be the same as with PEPs. The big difference is the range of funds that are available with an ISA," says Leslie Drummond of Edinburgh Fund Managers. "All our 13 trusts and 15 Oeics are available compared with nine trusts and 12 Oeics that could be PEPped. If the investor comes to us direct to buy an investment trust ISA, the cost will be a pounds 30 joining fee, or free to existing PEP investors, plus a 0.5 per cent annual management charge on top of the underlying funds charges. These are usually under 0.5 per cent for typical funds.

"If the investment is through an IFA, there will be an initial 4 per cent charge and an annual management charge of between 1 and 1.5 per cent depending on which fund is chosen."

Different pricing structures are being adopted by other management groups, but it looks like it will be more expensive to buy investment trust ISAs through a commission-based IFA. Foreign & Colonial is imposing a 5 per cent initial charge and 1.5 per cent annual management charge for IFA sales, compared with a pounds 50 joining fee and a flat pounds 60 annual administration charge for direct buyers. "Minimum investment will be pounds 100 per month for regular savers," says Jeremy Tigue of Foreign & Colonial.

At Flemings, another leading investment trust manager, the charge to direct ISA buyers will be pounds 25 per fund plus a low annual management charge, with a 1 per cent dealing charge for sales or purchases, while if sold through IFAs, the charges will be the same as for most unit trusts.

The change from PEPs to ISAs may cause problems, but the dual pricing of investment trust ISAs is likely to add to any confusion. It is too early to say whether discount brokers will be offering investment trust ISAs, but even if they are, so long as you are prepared to do your own research, it will be cheaper to buy direct. Now if only unit trust and Oeic managers would cut their charges for direct sales.

Suggested Topics
ebookA unique anthology of reporting and analysis of a crucial period of history
Luis Suarez looks towards the crowd during the 2-1 victory over England
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trade Desk Specialist (Linux, Windows, FIX, Finance, Networks)

£60000 per annum: Harrington Starr: Trade Desk Specialist (Linux, Windows, FIX...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Project Manager - ETRM/CTRM

£70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...

C#.NET Developer

£300 - £350 per day: Harrington Starr: C#.NET Developer C#, WPF,BLL,MVVM, SOA...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform