Frequently asked questions
Every adult in the UK has an annual ISA allowance which enables them to shelter money from the taxman. Ordinarily, returns on savings and investments are subject to income or capital gains tax. However, money held within an ISA is tax-free.
There are two types of ISA: a stocks and shares ISA and a cash ISA. Cash ISAs are like any other standard savings account, but with one fundamental difference: you don’t pay tax on any interest you earn.
Returns on stocks and shares ISAs are also tax-free but there is a much greater choice of what you can invest in. Investment funds, individual shares and bonds can all be held within a stocks and shares ISA. If you invested in these outside an ISA wrapper, your returns would be liable to capital gains tax.
There is more risk attached to a stocks and shares ISA however, as returns are dependent on stock market performance so there is no guarantee that that value of your investment will rise, it could fall and you may get back less than you originally invested.
The current ISA allowance is £11,520 and you have until the end of the tax-year – 5 April 2014 – to take advantage. You can either invest the full allowance in a stocks and shares ISA or split it and put up to £5,760 in a cash ISA.
It’s well worth using as much of your ISA allowance as possible each year as it is a valuable tax break and if you don’t use it, you lose it as you can’t roll-over any unused allowance to the next tax year.
To invest in a stocks and shares ISA, you’ll need to be a UK resident (or a member of the armed forces working overseas) and be at least 18 years old (for a cash ISA, it’s 16 years of age).
You can only take out the ISA in your name alone; you can't have a joint ISA.
Before you take the plunge and invest in a stocks and shares ISA you need to make sure that it is the right thing to do. It’s easy to be attracted by the prospect of high returns but remember, they’re not guaranteed! You could lose money as well as make money in a stocks and shares ISA because returns are dependent on the stock market and share prices can fall as well as rise.
Whether a stocks and shares ISA is suitable will depend on your own personal circumstances and objectives.
Before you invest in equities or bonds it’s important to build up some cash savings which can be accessed in case of emergencies. As well as a cash buffer, you should also look to pay off any credit card debts or outstanding personal loans before considering a stocks and shares ISA.
The other key consideration is the length of time you are looking to save for. If you will need the money within five years, then advisors recommend you stick with cash because of the extra risk associated with equities and bonds.
However, if you are looking to invest for longer than five years, perhaps you’re investing for your retirement or child’s university education, it is well worth considering a stocks and shares ISA. Not only can you shelter more from the taxman than you can with a cash ISA, but returns on equities tend to beat cash over the long term.
Investing in a fund – what is a fund?
A fund is a great way of getting exposure to shares or bonds. Obviously you can buy individual shares in a company but this is quite a high risk strategy as your returns will be dependent on how the share price of that firm performs. You can dilute the risk by investing in shares of multiple companies. Rather than doing this yourself, the easiest way is to invest in a fund.
Your money buys you units in the fund, which along with money invested by others is then used to buy company shares or bonds depending on what type of fund it is. The number of companies a fund invests does vary, but most have holdings in between 80 and 100 companies (with the notable exception of focus funds which invest in between 30 and 50 stocks).
A fund is therefore a great way of getting exposure to a large number of companies.
You can use your annual ISA allowance to invest in more than one fund. In fact splitting it between a few different funds enables you to spread your risk further as well as giving you exposure to a larger number of stocks.
What types of funds are there?
There are two main types of fund: active and passive.
Passive funds - Index trackers: The cheapest way to invest in equities is to go for an index tracker fund. These are known as 'passive funds' because they aren't run by a manager. Instead they are directly linked to a stock market index and will invest in every company within that index and this is all automated. For example, if you invest in a FTSE 100 tracker, you will have exposure to all 100 companies in the FTSE 100 and the value of your investment will move in line with the market.
The costs of running this type of fund are relatively low because there is no fund manager to pay. As a result there is no initial charge to invest in a tracker but you will pay an annual fee of up to 1.0%, so always hunt for a fund with the lowest annual charge because there’s no difference in where your money is invested. If one FTSE-100 tracker has a 1% annual charge and another a 0.25% charge, pick the cheaper one because the underlying holdings will be the same.
Because this type of fund tracks an index, you can never outperform the market. In fact the annual fee means your return will always be slightly lower. For example, say the FTSE-100 rises 7.0% over a year and you have a fund levying a 1.0% annual charge, the value of your investment would rise by 6.0%.
Tracker funds are the most common type of passive fund, but Exchange Traded Funds, which are available through stockbrokers and some IFAs are also passive funds. They work in the same way as a tracker in that they follow a stock market index or sector, but they are bought and sold like shares so there are trading costs involved.
Active funds: If you invest in an actively managed fund, a fund manager will decide which companies to invest in based on where they perceive the best opportunities to be. They will then buy and sell holdings as they see fit.
This doesn't mean they can invest in any firm they want - there are restrictions depending on the type of fund. For example, if it's a UK Smaller Companies fund, the manager will only be able to invest in companies listed on that index.
However, because the manager can pick and choose which shares to buy and sell, you should, in theory, be able to get a better return from an actively managed fund than an index tracker. If the manager gets it right, he or she should be able to outperform the index.
This isn't guaranteed, however, and some managers are better than others. Just as there is the potential to beat the index, there's also the potential to underperform the index.
Also, fees are higher on actively managed funds as you are paying for the manager's expertise.
You will be charged an initial fee of up to 5.5% when you first invest in the fund. However, this could be lower if you invest via a fund supermarket or discount broker because they negotiate discounts on many initial charges.
There will also be an annual management charge of between 1.0% and 1.5%.
Unit trusts and open ended investment companies (Oeics) are both types of active funds, so too are investment trusts. However, investment trusts are slightly more complex than unit trusts and Oeics in that they themselves are companies that are listed on the stock market. Because of the added complexity, IFAs tend not to recommend investment trusts to novice investors.
What is a multi-manager fund?
A 'multi-manager' fund is where your money is invested in other funds rather than a basket of companies. The idea is to spread the risk to your money across an ever wider remit than a basket of individual companies: for example, you’d buy into one multi-manager fund that then invested your cash in stock market funds covering Europe, the US and the Far East. However, the ‘double layer’ of fund costs is expensive and raise your annual costs considerably.
What is a structured product?
Structured products have a set term – often three or five years - after which you get your money back plus growth, if the index the product is linked to rises.
They are popular with many people because they offer exposure to the stock market but without the risk – they often offer 100% capital protection which means that even if share prices fall you won’t lose any money. Not all have a total guarantee though, some will limit the amount you can lose so there is some risk that the value of your investment could fall you at least know it will can only drop a certain amount, 20% for example. So even if the index fell by more than that, you’d only lose 20% of your money.
However, as always there is no such thing as a free lunch and this protection comes at a cost. While you may be shielded from share price falls, you won’t benefit in full from any increase. Also, returns on structured products tend not to include dividends and dividends tend to form a significant proportion of your overall return over time.
The other thing that often catches people out is that structured products are notoriously complicated and many people don’t really understand what they are investing in. As a result, they end up disappointed when the product matures and they receive a smaller return than they were expecting.
For example, if you invest in a five year product that is linked to the FTSE 100 and the stock market index rises 50% over that time, it doesn’t mean you’ll receive 50% more than you initially invested. You need to read the small print as returns are often calculated using the average closing values of the FTSE 100 on set dates during the term. The return may, for example be based on the closing values over the last 12 months of the term. Therefore, the FTSE 100 could soar 45% in the first four years, but only 5% in the final year. This is an extreme example but it highlights the need to make sure you understand exactly what you’re investing in before you sign up for any structured product.
Investing in stocks and shares directly – self-select ISAs
For most people a fund will be the best option when it comes to investing because you don’t have to worry about which shares to buy and when to sell. However, for the more experienced investor, this can be part of the fun. For these people self-select ISAs are ideal.
With a self-select ISA, you can pick from a broad choice of investments including individual UK and international equities, gilts, bonds. You can also invest investment trusts, unit trusts, Oeics and exchange-traded funds if you want to use your ISA allowance to invest in a mixture of funds and individual shares.
There are additional charges with self-select ISAs because of the trading fees incurred when you buy and sell shares, so bear this in mind.
To open your ISA, you’ll need proof of your identity including your national insurance number as well as the usual address and residence checks to ensure you comply with money-laundering rules. Of course, you’ll also need all your debit card details to be able to transfer the cash into the tax-free account once it’s all set up.
Many providers now let you do the whole process online – application, confirmation and investment – as well as offer a user-friendly account to keep a check on its performance.
You can invest your ISA allowance directly with the fund provider but this is the most expensive option as you’ll probably have to pay the full initial charge which could be as much as 5.5% - £587.40 on a £10,680 investment.
Use a fund supermarket or discount broker, however, and you’ll be able to benefit from a discounted initial charge. In some instances you may not have to pay anything at all.
Using a discount broker or fund supermarket also means you can easily keep a close eye on your investments and their performance – if you spot a few months’ poor performance, then you can shuffle your fund portfolio or simply sell the underperforming fund.
Moneysupermarket.com sources a significant amount of data on all ISA funds in the UK. There are more than 2,000 funds out there! We have then identified a number of categories relevant to different investment decision.
The Popular category shows funds from recognised ISA providers. All providers in the list are within the UK’s top 40 ISA providers. The funds included in the list are performing within the top 50% of funds in their sector.
The rest of the lists follow a two step selection process.
The first step is to use the data to remove funds that are higher cost or have shown poor past performance. While there are many time periods we could use for this initial review, we choose 3 years as (for us) it represents the balance between ultra-short term and longer-term statistics. For the risk, income and ethical lists we have removed funds where the Total Expense Ratio (TER) was higher than 1.76% and have a minimum of two, three, four and five Crowns (a Financial Express rating). For the low cost list we have removed funds where the Total Expense Ratio (TER) was higher than 0.76%, but given that there are fewer funds in this category we have had to include all funds, including those with 1 Crown rating.
The second step is to work with an investment expert, Philippa Gee, to narrow it down to a selection of 10 funds for each list. Philippa has then considered various aspects with each fund, including the way the fund is invested; whether it be bonds or equities, the quality of underlying investment and the region of the world it invests in.
Performance is an aspect to be considered and while in reality it may have no impact on future returns, it certainly is a useful resource to check on the past ‘form’ and it is one of many details to take into account. The risk the fund takes, how its approach differs to others, the size of the fund and the pedigree of both the investment house and fund manager, as well as corporate or team changes, are other factors to add to the melting pot.
As all of the elements described can change, we review the lists regularly for those considering new investments.
Moneysupermarket.com has access to data for all the ISA funds available in the UK. There are more than 2,000 funds available! To make it easier for you we have grouped shortlisted funds into categories to help you decide.
The Low Cost list is a selection of “passive” funds, which are those funds that seek to track an index, which makes them lower cost.
The Income list is a selection of funds that aim to generate income throughout the year for investors. The funds available in the list are income units, so that you can request for the income to be credited to an account of your choice. Be aware the payment dates and income levels vary.
The Risk lists (please do bear in mind that funds on all lists include risks, not just these three) are a selection of funds that could have a lower, medium and higher risk performance compared to their peers. We have used the data expert Financial Express to get their classification of risk for each fund and then asked Philippa Gee, an investment expert, to put together a varied selection in each list.
The Ethical list includes funds that have either environmental or corporate social responsibility rules to select or exclude companies they invest in. We have looked at the Financial Express Crown rating initially to remove funds that have not shown consistent past performance, and asked our investment expert, Philippa Gee, to put together a selection of 5 funds for this category.
The Popular list is a selection of funds from mainstream brands in financial services, giving you the opportunity to see what they have to offer.
The funds in each list are ordered by an investment expert who has used the past performance data and fund cost, and combined it with her research to determine which ones are better placed at the top and which ones at the bottom. Those at the top of the list show a more balanced combination of quality, cost and past performance than those at the bottom.
The Popular list is ranked lower to higher risk and then overall cost (total expense ratio), we show you the lowest cost funds at the top and the highest cost funds at the bottom.
The ranking should not be construed as advice or a recommendation as all of the funds included could appeal to different groups of people. That is why we have ensured that for every fund you have some useful commentary to help you choose the ones that most appeal to you.
The order is NOT necessarily based on past performance. Performance is an aspect to be considered and while in reality it may have no impact on future returns, it certainly is a useful resource to check on the past ‘form’ and it is one of many details to take into account. Choosing a fund based only on past performance is like driving a car through the rear view mirror, it does not tell you the whole story and accidents are more likely. Remember, the value of your investment and the income derived from it can go down as well as up and you may get back less than you originally invested.
The funds in each list are ordered by an investment expert who has used the past performance data. We have used a risk rating provided by Financial Express, an expert source of investment data. Financial Express have looked at three things to come up with a risk rating for each fund.
They have looked at the risk of:
- the asset class that the fund invests in;
- the sector the fund is part of
- the fund itself
The way they look at risk is by looking at the ‘volatility’ of the returns, i.e. how much the fund returns can rise and fall within a year. Funds that rise and fall by a significant amount are considered riskier than those that show smaller movements.
The rating consists of five levels: funds rated five are deemed to have the most risk and funds rated one are deemed to have the least risk. It is important to note that this is a relative measure, so funds that are rated 1 are considered to be lower risk than funds rated 5, but they still carry a risk. As with all investments, the value of your investment and the income from it can go down as well as up and you may get back less than you originally invested. Past performance is no guide to future returns.
When you invest in a fund you effectively buy its units, but often you will have a choice as to the type of unit you buy depending on whether you want to take an income from your investment, or reinvest any dividends you earn.
Accumulator funds reinvest all the income you earn from dividend payouts back into the fund, which increases the number of units you own. These funds have accumulation units.
Income funds don’t reinvest dividends. Instead you arrange to have the money paid into a separate account. These funds have income units and are ideal for people who are looking to use the returns on their investment to supplement their income.
Some funds will be available on an accumulation or income basis but not all – for example, the companies growth funds invest in tend not to pay high dividends because their focus is on using the capital to grow the business as opposed to paying it back to investors. Such a fund is therefore only likely to be available on an accumulation basis.
Investing in a single fund is higher risk than investing in multiple schemes because you are totally dependent on the performance of that one fund. Your money is exposed to many risks such as collapse in the companies in which it invests, poor performance from the stock market index it follows, lack of growth in the part of the world in which it invests and below-par investing from the fund manager him or herself. To reduce these risks you can choose to buy more than one fund. This is called diversification, which essentially means you are not putting all your eggs in one basket.
By choosing more than one fund you can spread your money over different geographical regions, asset classes and different fund management houses. You can mix and match depending on what your preference is and the risk you are prepared to take. You may choose to invest in a UK fund that invests in bonds and combine it with a global fund that invests in equities; or you may stick to funds that invest in both equities and bonds (mixed asset funds) and choose funds that invest in different geographies; or you may want to combine a lower cost fund that tracks an index in a region with an active managed fund.
Regardless of how much risk you are prepared to take, you should still aim for diversification between different asset classes (cash, equities, bonds, property and commodities) to ensure that your investment portfolio is balanced and well-placed to ride the inevitable stock market ups and downs. You can build your ‘diversified’ portfolio over time by choosing different funds as you continue using your ISA allowance each year.
Whether you buy a single fund or a portfolio your money is still subject to risk. The value of your investment and the income derived from it can go down as well as up and you may get back less than you originally invested.
Cofunds is a leading investment platform. The company was set up in 2001 and is now co-owned by six well established financial services companies: Legal and General, Threadneedle, Newhouse Capital Partner, Jupiter, Prudential and IFDS.
Cofunds gives you access to more than 1,500 funds from over 90 fund managers. Through moneysupermarket.com you have access to the Cofunds Investment ISA to invest your ISA allowance and protect your investment from tax.
An investment platform is like a supermarket but for funds. You have access to different funds from different fund providers all in one place, and you can invest in more than one fund in one go with a single application form. A platform will also give you a single view and a consolidated report on your investments.
Cofunds has provided a comprehensive guide to investing via its platform. For more information, its contact number is 0845 610 5411. Lines are open 9am - 5pm Mon – Fri.