Mar
2020
Self-Select ISA
DIY Investor
9 March 2020
A Self-Select ISA is a type of stocks and shares ISA (as opposed to a Cash ISA) which gives the DIY investor total control of the investments that are held within it, subject to prevailing ISA rules.
Self-Select ISA is a tax wrapper that allows you to invest in the stock market but with no fund manager making investment decisions, you have freedom to choose what assets you hold and when you trade them, putting you in complete control.
These accounts are usually offered by execution-only (XO) stockbrokers or wealth management companies and (may) generate returns that are almost entirely free from income and capital gains tax.
‘a wide range of assets can be held according to your appetite for risk and investment strategy’
The same annual subscription limit of £20,000 applies to Self-Select ISAs as it does to Cash and Stocks and Shares wrappers and you have the freedom to split your allowance between product types.
Self-Select ISAs allow you to select which assets to invest in and a wide range can be held according to your appetite for risk and investment strategy. These include:
- Individual shares (UK/overseas, AIM)
- Funds – Unit Trusts and OEICs
- Investment trusts
- Bonds and Gilts
- Exchange Traded Products
- Complex instruments – Warrants, Securitised Derivatives, Structured Products
The cheapest way of opening a Self-Select ISA is via an execution-only broker which will oversee subscriptions and withdrawals from your account and any tax affairs are taken care of in the background; investment decisions are entirely your own via an online trading platform.
Brokers or wealth management firms that offer advice will charge more and will actively help you decide which shares to pick (advisory) or select them for you (discretionary) based on their knowledge of your individual circumstances and objectives.
Advantages of a Self-Select ISA
A Self-Select ISA gives you total freedom to choose the investments you want to hold giving you much greater control than if you handed things over to a fund manager, although there is no reason why you should not invest in a fund or range of funds within your wrapper.
A Self-Select ISA is likely to require a little more work than a managed product, but the need to set your objectives, understand your attitude to risk, put together a financial plan and construct an investment strategy are all in line with the groundwork required for the DIY investor.
‘A Self-Select ISA gives you total freedom to choose the investments you want’
You shouldn’t really have any investments that keep you awake at night, but it is wise to monitor the performance of your portfolio and adjust it in order to stay in line with your investment strategy or perhaps altered circumstances or objectives; it is good DIY discipline to get a series of dates in the diary to monitor your investments.
The key advantage of a Self-Select ISA is the tax benefit; investment growth is entirely free of capital gains and income tax, except share dividends which are paid after a non-reclaimable 10% tax deduction, which is of particular benefit to higher rate taxpayers who would otherwise pay 40% or more.
Online broking platforms deliver copious amounts of historical and product data in support of your investment decisions, and make it very easy to monitor the performance of your investments, delivering the investor confidence and control.
Albeit that you will incur dealing commissions, there is total freedom to change the investments held within a Self-Select ISA and if the screens were to turn red, there is now the freedom to move the value of your investments into a Cash ISA.
Online brokers charge modest fees for a Self-Select ISA wrapper – Share Centre for example charges £4 + VAT pcm and also offers ultra low dealing commissions on regular investments – 0.5%, with a minimum of £1.
Other platforms may charge you a percentage of the value of your pot; this is often capped so that it does not become a penalty for your success.
Risks of a Self-Select ISA
Investing in a Self-Select ISA is inherently a lot riskier than opting for a Cash ISA; the value of some, or all of the investments within the wrapper can fall as well as rise and there’s no guarantee that you’ll get back your initial investment.
Your money is covered by the Financial Services Compensation Scheme should your ISA provider go bust and if you are confident in your ability to manage a portfolio in pursuit of your personal objectives and in line with your appetite for risk, then a Self-Select ISA may be the right vehicle for you.
Basic rate taxpayers don’t see any real tax benefit from investing via a Self-Select ISA because they will only pay 10% income tax on their investments anyway, regardless of whether they are held within a wrapper.
By eschewing the instant diversification of a managed Stocks and Shares ISA those looking to build their own portfolio will need to be aware of the dealing commissions associated with purchasing a variety of investments.
Stocks and shares tend to pay off over a longer term, so Self-Select ISAs may be the answer for relatively experienced, higher rate taxpaying investors looking to build a large portfolio of shares over a long period of time.
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[…] such as index trackers or Exchange Traded Funds; alternatively the DIY investor may opt for a Self-Select ISA which is essentially an empty wrapper, typically held with an execution only broker, in which their […]