Thursday 13 May 2021

Find the Best Deal for an ISA Platform

The Individual Savings Account or ISA is a 'must-have' for UK DIY Income Investors. It shields you from taxes, including income tax, dividend tax and capital gains tax. (Something similar may be available in other tax administrations - if you are lucky.)

I have two different ISA accounts (and manage family SIPPs) and I am careful not to exceed my annual investment allowance. But am I getting the best deal that I could?

Why You Need An ISA

An ISA is essentially a standard brokerage account with a tax-free wrapper. Investing in an ISA is one of the few opportunities we have for making money tax-free. Each tax year investors get an ISA allowance they can put into the ISA - currently £20,000. Any income or gains in an ISA do not count towards your other tax allowances. Moreover, ISA investing also means you don't have to fill in dividend income on a self-assessment form and removes the headache of tax returns for any capital gains.

Capital Gains Tax

Any gains within an ISA are free from capital gains tax (CGT). Everyone has a fairly generous CGT allowance and many may feel they are unlikely to ever make more than this in profit each year from selling their assets. However, those who invest consistently over time may one day be surprised at how much those investments are worth and holding them in a tax-free wrapper makes sense.

Dividend Tax

Income from investments is also treated in a tax-friendly way in an ISA. The tax-free dividend allowance has been cut from £5,000 to £2,000 (and beyond that, tax rates depending on your income tax rate). However, if you hold shares, investment trusts or a fund in an ISA there is no tax to pay on dividend income. While you may be nowhere near using all of the £2,000 dividend allowance now, you might get there one day, so putting your investments in a tax-free wrapper is a sound tactic.

Income Tax

Income other than dividends from investing may be taxable, depending on your personal situation, although there is a Savings Allowance (e.g. £1000 for a Basic Rate taxpayer).

Which ISA Is Best?

Think about what you want to invest in: shares, bonds, funds, ETFs, investment trusts etc, and how you want to do so: lump sum, buy-and-hold, regular investing or trading.

It's important to to look at the service that the provider offers, along with administration charges and dealing fees, plus any other extra costs. Don't forget that there is a balancing act between administration fees and dealing charges, depending on how often you are likely to trade.

I haven't thought recently about how much I am paying for my ISA platform - over time, these ISAs have changed ownership and charging structure. So I was intrigued by a recent article on This Is Money describing 'How to choose the best (and cheapest) DIY investing platform and stocks and shares Isa' 

The article points our five things to consider when picking an investing platform: 
  • 1. Cheapest is not always best
  • 2. What will you invest in
  • 3. Tools and information
  • 4. Overall charges 
  • 5. Extra fees 

Administration Charge 

DIY ISAs very in their administration charge - either a flat administration fee or a charge based on a percentage of investors' holdings (usually with a maximum per month or quarter), 

Dealing Charges

Nearly all platforms make charges for buying and selling securities, which might vary by type of security (such as shares, investment trusts, funds etc. For some, the administration charge may bundle in the cost of buying and selling

If you are a 'buy and hold' investor (as I hope you are) you may benefit from a flat fee rather than percentage-based charging but if you plan on buying and selling regularly the dealing charges can add up substantially. 

My Portfolio

I hold ISAs with iDealing and interactive investor (previously tdwaterhouse) and a SIPP with AJ Bell YouInvest (previously Sippdeal). How do these compare? (Note: iDealing was not included in the This Is Money article.)
  • iDealing: admin. £5 quarterly; share dealing £9.90
  • interactive investor: admin. £9.99 per month; share dealing £7.99 (there is one free trade every month) 
  • AJ Bell YouInvest: admin. 0.25% (max £3.50 per month for shares, trusts, ETFs;  £10 for Sipps), share dealing £9.95.

So, for my purposes, iDealing and AJ Bell YouInvest are similar cost for ISAs, while interactive investor is more expensive unless I trade once a month.

The only cheaper options (for my purposes) identified in the article are: iWeb and Vanguard.


iWeb is run by Halifax sharedealing and offers a competitively priced service with a £100 one-off set-up charge but then no admin charge beyond that. Share dealing is just £5. 

Definitely cheaper than my other options - but is the business model sustainable over time with no admin charge?


US giant Vanguard has set up a UK investing platform but you can only buy its funds. It is cheap with a 0.15% per year fee and has no costs for buying and selling. You can use this to buy Vanguard's simple and cheap passive funds, its active range, or its all in one LifeStrategy funds that invest in shares and bonds around the world.

Conclusions

I am reasonably happy with my existing accounts, with the exception of interactive investor, which seems a bit over-priced to me. Having said that, the costs represent a very small cost overall compared to the value of the portfolio. It is possible to transfer an ISA to another provider but everything in the account must be sold and then repurchased in the new account, which would lead to a fair amount of transactional costs. It is questionable whether it would be worth the effort.

However, I am taken by the Vanguard ISA. As I already hold a large holding in Vanguard's VHYL, it might be an idea to put any new cash into a Vanguard ISA, buying VHYL and sell VHYL in the other accounts. But I'm not sure this would save much money overall - if  any - so again, it may not be worth the effort.



I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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