Ways to buy an ISA

It’s about this time of year that financial firms start to tempt us with their Isa offers.

Individual savings accounts are a tax-efficient way to save. You can invest up to £7,000 a year in an equity Isa without having to worry about capital-gains tax (CGT). Or you can put up to £4,000 in an equity Isa and a maximum of £3,000 in a cash Isa, where the interest is tax-free.

The deadline to invest this year’s allowance is April 5, but IFA Promotion calculates that we are wasting £170m by failing to make use of the tax perks of Isas.

There are thousands to choose from, so it isn’t easy to pick the perfect one. But you shouldn’t even think about saving if you have debts on credit or store cards. You are almost certainly paying out more in debt interest than you could earn from a savings account or the stock market.

If your finances are in good shape but you don’t want to take a risk with your money, stick with a cash Isa. It is just like a savings account, so you can be pretty sure you won’t lose out. There is a table of the best cash Isa rates on page 11. Just watch out for any catches or short-term bonuses.

People with no costly debts and a chunk of cash in a savings account should consider equity Isas. We could argue all day about the statistics, but studies show the stock market beats a cash account over the long term.

You don’t have to pay CGT on any growth in your equity Isa, but how much is the tax perk really worth? Everyone has a CGT exemption of £8,800 in this tax year anyway. So you can already make an annual tax-free profit of nearly £9,000.

Even if total gains exceed the allowance, you can cash in your investment in annual slices to use up each year’s exemption. In other words, it’s easy to avoid CGT.

It’s not so easy to avoid income tax, so a cash Isa might offer a more valuable tax perk. I know several financial whiz kids who always put the full £3,000 in a cash Isa and commit the remaining £4,000 to an equity Isa because it makes perfect tax sense.

So, how do you know which is the best way to buy an equity Isa? Generally, you should not go direct to the fund firm because it will charge you more than a discount broker or a fund supermarket.

Having said that, this is the time of year when many firms offer tempting discounts to get you through their doors. Here are my three top tips for buying an equity Isa.

1Use a fund supermarket

Equity funds typically have an initial charge of 5.5 per cent, which includes commission of about 3 per cent for financial advisers. However, if you go direct to the fund firm, they do not generally rebate that 3 per cent even though you have not taken advice, so you still pay the full whack.

Using a fund supermarket can cut costs considerably. Artemis UK Special Situations, for example, has an initial charge of 5.25 per cent and an annual fee of 1.5 per cent. If you invested £10,000 and it grew by 7 per cent a year for 10 years, you would have £16,185 after charges.

Alternatively, you could buy the scheme through a supermarket such as Funds Network (fidelity.co.uk/ fundsnetwork). It typically waives about half the upfront commission it would receive from fund managers and negotiates discounts on the rest.

It would reduce the upfront fee on Artemis UK Special Situations to 2.25 per cent. After 10 years, your £10,000 investment would be worth £16,697 after charges — £512 more than if you bought direct.

Supermarkets have other advantages. You can reregister your unit trusts, Isas or Peps so you can view your portfolio all in one place. And if you decide you want to switch funds, you do not have to sell and buy back your holdings, so you are not out of the market.

Once your fund is registered with Funds Network, you could switch to an alternative fund for an initial charge of just 0.25 per cent.

Other fund supermarkets include Ample (ample.com) and Cofunds (cofunds.co.uk).

2 Try a discount broker

Discount brokers — financial advisers who do not offer advice — may be even cheaper than fund supermarkets.

Bestinvest (bestinvest.com), for example, would rebate the full 3 per cent commission on the Artemis fund and also knock another two percentage points off the initial charge, reducing your upfront costs to just 0.25 per cent. However, it still takes annual commission of 0.5 per cent, so your fee would remain at 1.5 per cent a year.

If you invested in the Artemis fund through Bestinvest, your £10,000 would be worth £17,039 after 10 years, inclusive of charges — £854 more than if you bought direct.

Other discount brokers include Hargreaves Lansdown (h-l.co.uk), Chelsea Financial Services (chelseafs.co.uk) and Torquil Clark (torquilclark.com).

Some brokers also rebate part of their annual commission for a fee. Intelligent Money (intelligentmoney.com) returns the full 0.5 per cent for a fee of £35; Cavendish (cavendishonline.co.uk) takes only the first £10 of any renewal commission in return for a £20 fee.

If you invested £10,000 in the Artemis fund through Cavendish Online, it would be worth £17,628 after 10 years.

3 Check out discounts

While the best advice is normally to steer clear of fund firms, it is worth checking at this time of year to see if they are offering any discounts.

Gartmore, New Star and Schroders are all offering Isa discounts.