The wonderful thing about ISAs is that they give us investment growth and income that is entirely sheltered from tax. Not only that, we’re given a generous contribution allowance of £20,000 per year. The question, therefore, isn’t ‘should I use an ISA’, it’s ‘which ISA is best for me?!’
As with anything in life, there isn’t a one size fits all answer, so in this article I am going to highlight the best ISA for a couple of different situations. These scenarios probably cover the needs of 95% of UK investors so if you’re not sure where to start, or if you just want to check you’re in the right place with your existing ISA, read on!
A World Of Choice
Anyone can be forgiven for being confused by the sheer volume of ISAs out there, but if investing directly (not through an adviser), the main players you’ll consistently come across are:
And the share dealing platforms:
Between these companies you could achieve pretty much any ISA investment objective you may have. No single company offers the best investment ISA solution for every objective though. Different charging structures are geared towards different types of investor.
It’s possible that your existing ISA, which may previously have offered the best fit, has been overtaken by another provider’s ISA. That’s why it’s important to always review your plans.
How To Determine Which ISA Is Right For You
For me, the simplest way to determine which ISA is best is by answering two questions:
- How are you going to invest?
- What are you going to invest into?
If you want to invest a lump sum into a fund for the long term, dealing charges won’t be an issue because you won’t be frequently buying and selling.
On the other hand, if you’re going to be buying at different intervals and you want to invest actively into shares directly, you’ll really want to pay attention to dealing charges and FX fees.
Or are you looking for a really wide choice of investment options? If you want access to things like REITs and Investment Trusts, platform costs aren’t the only consideration.
Which Is The Best Investment ISA 2021/22? The Most Popular Investment Scenarios…
To give an example, I’m going to outline some common investment scenarios and suggest which would be the best investment ISA for each. You can then relate this your own situation.
Scenario 1 – The Passive Lump Sum Investor
Let’s say you want to invest a lump sum of £20,000 into index tracking ETFs (we’ll assume Vanguard ETFs). You’re not intending to switch around between funds, you just want to ‘set and forget’ for the long term.
We’ll also assume that you haven’t built up substantial investment ISA funds already. Including this investment, you’ll have less than £80,000 invested.
Based on cost, I’d immediately eliminate these providers, because you’d be paying for features that you don’t need:
That would leave the trading apps Freetrade and Trading 212, and of course Vanguard themselves with their own direct platform (Vanguardinvestor.co.uk).
Vanguard charge a 0.15% annual platform fee.
Freetrade charge a flat £3 a month for their ISA wrapper, which on a £20,000 investment would equate to 0.18% over the year. That percentage would fall as the investment value rises.
Trading 212 charge nothing, so providing you’re buying sterling denominated ETFs, they provide the cheapest option.
The only charges you’d be paying are the ETF’s own charges, which range from around 7 to 29 basis points (0.07-0.29%).
However, unless you’ve already got a Trading 212 account open, at the time of writing, you’re not able to open one. They have paused new account opening and no one is quite sure when it will resume.
Which Is The Best Investment ISA For This Scenario?
Due to the fixed nature of Freetrade’s ISA charge, as soon as your ISA value exceeds £24,000, it becomes cheaper than Vanguard’s own platform.
You’ve also got access to other company’s ETFs as well, whereas Vanguard’s platform only allows you to invest into their own ETFs. So, if you haven’t got Trading 212, Freetrade may be the best option in this scenario.
A couple of caveats though!
If the ETFs are non-sterling, FX charges will come into play, which are essentially mark ups on currency conversion. Those are 0.15% on Trading 212, and 0.45% on Freetrade. These fees are much lower than FX fees on most other platforms, but you need to be aware of them.
Also, if you were looking to invest into index funds such as Vanguard’s Lifestrategy range (where your underlying holdings are automatically rebalanced), you can’t access those on Freetrade and Trading 212 because they don’t offer funds.
Vanguard actually provide some really useful information about the importance of rebalancing on their website, which you can find here.
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Scenario 2 – The Active Trading Investor
Let’s say you’re somebody who’s quite adept at trading and investing. You want to buy and sell direct shares within your ISA wrapper and trade fairly frequently; the choice seems fairly obvious for this…
Freetrade and Trading 212 would be far more cost effective for this type of plan management. Even though other platforms offer more investment choice, there’s still enough for most people on these platforms.
The likes of AJ Bell, Fidelity, Hargreaves and Interactive Investor charge between £8 and £12 PER trade as opposed to ZERO, not to mention some eye watering FX fees.
Scenario 3 – The Fund Investor
Perhaps as well as holding Vanguard Lifestrategy, you want to invest into other funds with well known fund management groups.
Maybe you’re close to or in retirement and you want to consolidate wrappers onto a single platform to manage your income withdrawals more efficiently?
That’s when the big players like Fidelity, A J Bell and Hargreaves Lansdown start coming into the picture.
They’re all comprehensive multi-wrapper solutions, which allow you to do everything the share trading apps do, but more. Hence why they carry higher charges.
If I was to generalise very briefly between them:
Hargreaves probably offer the widest choice of investment solutions, but are the most expensive.
A J Bell are the most cost effective if considering just platform charges alone, but offer the smallest range of investment funds.
Fidelity are second place on both, so are a pretty good all-rounder.
I’d have to say though, if you have already built substantial funds, trumping all three of them is Interactive Investor…
Why Do Interactive Investor Beat Their Competitors?
They’ve got an extremely wide fund choice and a flat monthly fee of £9.99 per month. So, if you’re just holding ISA investments, they become cheaper than AJ Bell when you hold over £48,000 on the platform.
That’s because AJ Bell apply a 0.25% charge to funds of that size. When your investment is £48,000+, that percentage starts costing more than the flat £120 paid to Interactive Investor.
Interactive Investor also offer a SIPP for an additional £10 a month. This means that combined ISA and pension assets of £96,000 would see them become more cost effective than AJ Bell.
The fixed charging structure would even see them beat Vanguard’s charge of 0.15% when values exceed £80,000 (ISA only) or £160,000 (with SIPP).
Finally, whereas the other three providers charge for making regular monthly investments, Interactive Investor don’t do this.
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So, hopefully from that summary you can apply your own situation and decide which is the best ISA to use for your needs.
The ‘Curve Ball’ Provider – A Totally FREE UK Investment ISA
In fact, it could be EVEN BETTER THAN FREE…
There is one UK ISA provider that will PAY YOU to use their ISA, and that provider is Vitality Invest.
In order to get the platform for free though, you need to engage with Vitality’s Healthy Living Programme. That means putting down that bowl of crisps, getting yourself some nice new gym gear, and getting active!
The platform charge you pay depends on the Activity Level you achieve, ranging from bronze to platinum.
It would require a separate blog post to explain the ins and outs of Vitality’s points system. Trust me though, in order to reach platinum you’d really need to get a sweat on!
The thing to bear in mind is if you didn’t engage with the Healthy Living Programme and stayed at bronze level, your platform charge would be 0.45% and therefore at the higher end of the providers mentioned above.
Also, you’ll only achieve the 0% platform charge if you use one of Vitality’s own funds. These are a selection of purpose-built funds put together by Vanguard, SEI and Ninety One.
The funds range in price but if you were to use the index-based options, which are solely comprised of Vanguard ETFs, your fund charge would be 0.25%.
‘Wait A Minute Though… You Said Vitality Would Pay Me?!’
Yes I did! Here’s how…
You must remain invested in the Vitality funds for 5 years. If you do, Vitality will give your investment a 2% boost. They won’t just do it once though, they’ll do it every five years.
So, assuming the following:
You achieve Platinum Vitality status every year
Your fund costs over five years are 1.25% (0.25% x 5)…
Your 2% boost means the plan isn’t only free, you’re actually 0.75% in credit!
From a charging perspective, this would definitely make it the best investment ISA in 2021/22.
Not everyone will achieve Platinum Vitality Status every year though (in fact, Vitality probably know that most people won’t). But, the possibility is there and if you’re already quite an active person, it might be quite easy for you.
Or, if you’re somebody who needs motivation to get healthy, this is quite a clever idea!
Who do you use for your investment ISA? Let me know in the comments below!