Simple investing questions - use an ISA, transfer costs?

You cannot transfer cash from a cash mini-ISA to a share ISA. You have to withdraw the cash and reinvest it using this year's allowance for a share ISA, be it mini or maxi.

If you take the long-term view, it is always worthwhile sheltering shares and other equity investments in an ISA. Note that not all ISAs allow you to mix shares and funds. You need a self-select ISA run by a body which allows this. Examples are those run by Hargreaves Lansdown, SelfTrade and Alliance Trusts.

The advantages are the freedom from telling HMRC about any capital gains or income from the shares or funds, and the absence of any future tax liabilities on such gains or income. Remember that the ISA allowance is available for one financial year only, so use it or lose it. You may become a higher rate taxpayer in future years, and your shares may unexpectedly rocket.

You can invest in just one share in a company if you wish, but the brokerage charge may be a little penal. Halifax Sharebuilder is suitable for relatively small investment amounts, with a low fixed charge, and the Share Centre charges a percentage with no minimum.

Shares should really be held for the long term, 5 years or more, otherwise you need the traders mentality, and very few traders make money out of their trading, despite what they may say.

Thank you for your replies Terry, very much appreciated. (Comments below).

OK, thank you for the pointers. I will invest inside an ISA.

Hence the question ;-). Thank you for the pointers to companies with low fees for small investments.

*Nod. I'm doing this as an alternative to entering the housing market as a first time buyer. I love the rented house I'm in, and don't fancy buying right after a boom!

I'm planning on keeping the investment as a whole long term, but re-appraising my holdings every year. Not a good strategy given the brokerage costs compared to the size of my holdings, but I get some experience in the process which may come in handy later.

I know that picking only two stocks will make my money pretty volatile/risky, but I have the other savings in safer investments.

In message , James writes

I support everything Terry says.

I would respond to the above para from you though. The amounts involved are not really large enough to justify direct equity holdings, have you thought of decent Unit Trust or OEIC?

Notes:

Many self select ISA's will charge a fee - I would avoid those in your circumstances.

Put the Index tracker in a (no-fee) ISA, and the shares not in an ISA.

Putting 1k into a single stock (twice) is absolutely no problem IMO, the charges these days are far outweighed by the fun and experience gained.

The length of time that shares should be held for varys greatly depending on which share(s) you buy and why you pick them. But you should think of your exit criteria at the time you buy e.g.

- I will sell when they double in value

- I will sell when they rise to the point that the dividend drops to 2%

- I will sell when their annual profit growth drops below 10%

- I will sell after the 2012 olympics finish.

- I will sell when my aunts goldfish dies.

AIUI, for equities, ISAs aren't such a great deal. You don't have to pay capital gains tax on an investment in an ISA, but then the threshold for CGT is pretty massive anyway - you're not going to get anywhere near it with the amounts your investing, so there's no practical benefit here. As for income tax, well, although you don't pay income tax on interest in a cash ISA, you do pay it on dividends in an equity ISA; the government weasel their way out of this with some argument about the tax being paid at the company's end, not the shareholder's, but it's basically a con. There is a small ray of sunlight - income tax on dividends is normally 10% for starting- and basic-rate taxpayers, and 32.5% for higher-rate taxpayers, but for dividends in an ISA, it's 10% regardless of income. However, since you're a basic-rate taxpayer, there's nothing in it for you.

Although i may have completely misunderstood the rules - someone will no doubt correct me if i have.

I have to say, the rules as they stand are completely bonkers - they mean that wealthy people with big investments benefit from no CGT and reduced income tax, whereas those of more meagre means, like you and me, get nothing. This seems to be completely arse about face.

Having said all that, all my investments are in ISAs anyway - even if there wasn't much of an upside, there didn't seem to be a downside. Plus, one of my funds had a special offer discount on the initial charge if you went through an ISA.

Personally, when i was investing my life savings, i never even considered this, as i thought the risk of losing it all, or of only getting measly returns, was too great. Instead, i went for a fund, since this was likely to be safer than a single stock; Daytona of this parish pointed out that the class of funds known as income funds, which focus on stocks with high yields, are both lower risk and higher return than index trackers, so i went for one of those (the Invesco High Income fund, to be precise, which has indeed done very well over the last year).

However, i think investing it in one company (or a few) you've picked yourself would be rather good fun; if i wasn't looking at the grim prospect of having to put down a 30k deposit on a house in five to ten years time, i might have done it myself. When i started sorting out my investments last year, i decided to put half in cash, since it was absolutely(ish) safe, and half in the safer end of the market, since it was likely to grow more. I've since changed my mind a bit - i want a third properly safe in cash, a third in basically-safe-over-the-long-run tracker or income funds, and a third in ludicrously risky but glamorous gambles; so far, i'm into the Indian stockmarket for a grand, and Russian equities for two, both through JPMorgan funds. Yes, again these are funds with someone else doing the fun bit, but it's still more entertaining than a tracker or some stodgy UK fund.

Anyway, what i mean by all that is yes, maybe 1 or 1.5k rather than 2, and maybe in chunks of 500 or 250, so you spread the risk and get to play with more companies, but that sounds like a good idea.

tom

Well it seems that the self select share trading accounts that work within an ISA all charge annual fees that I'd rather avoid. I think that I'll shop around, and if I can find an account that uses an ISA for no extra charge I will. Otherwise in my circumstances there probably isn't much point.

These income funds sound interesting, I'll investigate and may use one of those instead of the index linked fund.

I'm not really worried about the risk... I'm keeping 2k in cash for emergencies, 1k in a safer investment, and 2k for whatever seems to be the best return/risk. Even if I lost ALL MY LIFE SAVINGS, I've only just started my earning life and I could regain it in a year if I took it seriously.

I'll have to investigate the JPMorgan offshore funds too! I was originally interested in investing overseas, but pushed that idea aside as I couldn't figure out how.

The reasoning behind splitting the 2k between just 2 companies is to keep the trading costs down. A 10 pound trade on a 1000 pound investment is 1%, so that's already cutting down on my returns. If I can find an account with low trading costs I'll spread myself a little more.

James

Thank you for your notes =].

I'll make sure to decide on a sensible investing strategy. There seems to be loads of information on that out there (although I bet a lot of it conflicts!), so I should be OK with that.

Regards,

James

Definately. The idea behind the direct equity holdings is to get experience for when I do have more cash to invest. A real stake will mean that I take a greater interest in the markets than trying to watch them only for the knowledge.

At the end of the day I'd like my investments to make a good return though, so that's my primary goal.

I'm trying to achieve:

2k in liquid cash. 1k in reasonably liquid reasonably safe investments. 2k in high growth (and high risk I suppose =/) investments.

Where would Unit Trusts or OEIC's fit in that? Will there by any that would fit into my high growth/risk category?

Kind Regards,

James

There are many emerging markets funds out there:

My Latin American one has doubled in the last year or so :-) My Indian one has gone down 25% in the last few months :-(

Think of Investment trusts currently trading at a discount.

In message , James writes

Yes, higher risk is appropriate. As others have said, go for an equity income fund that looks to invest in companies that pay than average dividends. IN the current climate the reinvested income bolsters the capital growth. Be sure to get the 'accumulation ' version of the units. Go for a a bottom up stock picking fund such as Jupiter Income, Invesco Perpetual Income and Higher Income etc.,

Would you really call that a High Risk strategy ????

I think wait until Eurotunnel emerge from protection and buy some. - That would be high risk and good fun :-)

In message , Miss L. Toe writes

No, re read what I wrote. I said 'higher' being higher than cash. I reckon the OPs threshold of 'higher risk' is somewhat different to your and mine.

I'll have some of that! :-)

There is still a tax benefit in putting bonds in an ISA, as you get tax relief on the interest.

If that is all the funds you have, I would suggest you keep it all in liquid cash. It is generally suggested you keep at least 6 months net pay in cash to cover emergencies.

Just remember that, if someone had used their PEP and maxi-share ISA entitlements to the full, they could easily be sitting on holdings of approaching, or more than, half-a-million by now. CGT and Higher-rate tax are both likely to become liable, and in the case of retired persons, withdrawal of age allowances.

One a one-year view it may not be attractive, but on a 20 or 30-year view it definitely is.

The annual fee for a self-select ISA with Selftrade, for example, is £25. That is 1% of £2,500, and compares well with any unit fund which is likely to be charging between 1% and 2% per annum management fees. If you are happy to pay annual charges to a unit fund manager, you should be ecstatic at paying a smaller fee to run a self-select ISA.

But for what benefit ?

Consider what 25 quid might get you in other walks of life:

15 mins of BMW machanic 20 mins of callout plumber 30 mins of an accountant's assistant filling in forms and photocopying 6 mins of lawyer-time

How much is your own time completing tax returns worth?

If you /really/ don't want to pay 25 quid p/a, go for the selftrade 'free' dealing account.

rgds, Alan

I've taken that into account. As a young single man with few responsibilities and plenty of flexibility I'm happy with the 2-4 months living costs I've got spare.

Cheers for the advice though, it's appreciated.

Regards,

James