Best Investment ISA 2021/22

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

 

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:

 

Vanguard

AJ Bell

Hargreaves Lansdown

Fidelity

Interactive Investor

 

And the share dealing platforms:

 

Freetrade

Trading 212

 

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

 

Which ISA?

 

For me, the simplest way to determine which ISA is best is by answering two questions:

 

  1. How are you going to invest?
  2. 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

 

Passive

 

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:

 

AJ Bell

Hargreaves Lansdown

Fidelity

Interactive Investor

 

That would leave the trading apps Freetrade and Trading 212, and of course Vanguard themselves with their own direct platform (Vanguardinvestor.co.uk).

 

Charges Comparison

 

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.

 

WANT A FREE SHARE ON FREETRADE WORTH UP TO £200? JUST USE THE LINK BELOW AND YOU WILL BE REWARDED WITH A FREE SHARE WHEN YOU FUND YOUR ACCOUNT:

 

Freetrade

 

https://magic.freetrade.io/join/chris/502d8d3b

 

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

 

Active 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.

 

DO YOU THINK INTERACTIVE INVESTOR COULD BE THE BEST PLATFORM FOR YOU? CHECK THEM OUT USING THE LINK BELOW…

 

 

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

AND

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!

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STOCKS AND SHARES ISA MILLIONAIRE IN 7 YEARS?!

Stocks and Shares ISAs Millionaire in just 7 years?!

Stocks and shares ISA millionaire has a nice ring to it, don’t you think? Hi guys, welcome to the Tax Free Investing Blog where I discuss strategies to make sure you’re getting the most from your money by keeping more of it yourself and paying less in tax.

Today we are focussing on the ISA wrapper. We will be discussing a specific investment strategy which, based on its recent performance, is putting investors on target to reach £1m value with just the minimum annual ISA subscription (£20,000) in only seven years.stocks and shares ISA millionaire

Before we begin, let me introduce myself. I’m Chris Bourne. I’m a financial planner here in the UK specialising in wealth management, retirement planning and tax planning.

I help people achieve financial independence early, tax efficiently. If you want to read any other posts on my blog click here. Or check out my YouTube Channel for informative videos.

So… What’s An ISA?

Many people will already know what an ISA is. For those who don’t, you might have some questions! Exactly what is an ISA? What are a stocks and shares ISAs? What are the returns on stocks and shares ISAs? Well, don’t worry, let me explain these things to you now in my own little beginners guide.

ISA stands for Individual Saving Account. It is an investment ‘wrapper’ (more on this below), which shelters gains made on your investments from all forms of UK tax.

What Is An ‘Investment Wrapper’?

One of the first things to explain about an ISA is that it is not the ISA that determines the return you receive. The investments held within the ISA are what produce the return… the ISA simply determines how those returns are taxed (or not taxed as the case may be).

A ‘wrapper’ therefore describes the account within which investments are held. Other examples of wrappers are pensions (personal pensions, SIPPs, SSASs etc) and investment bonds.

There are different types of ISA available, which can be confusing. Let’s get into them…

Generally three types of ISAs exist and two additional, what I call ‘subcategories’. These ‘subcategories’ are Lifetime ISAs and Junior ISAs. Those are for another day. In this blog, let’s stick to the three main types of ISA:

Cash ISAs, Stocks and Shares ISAs and Innovative Finance ISAs

  • A Cash ISA is simply a savings account held within an ISA wrapper. These are usually held with a bank or a building society, and the return you receive will be the interest offered by the savings account. You can open a Cash ISA from the age of 16.
  • A Stocks and Shares ISA holds stock market-based investments like shares, ETFs, managed funds and index funds. You can open these from aged 18.
  • An Innovative Finance ISA holds what are called ‘peer to peer lending’ investments. Your money is used to fund borrowing by individuals or companies, for which you get paid an interest rate (higher than you could expect from a Cash ISA, with proportionately higher risk).

different types of stocks and shares isa millionaire

How Do They Work?

Each ISA carries different types and levels of risk, which result in different levels of return.

You can pay in a maximum of £20,000 per tax year into ISAs in the following ways:

  • Fully into just one type of ISA
  • Split between two
  • Split between all three

You can’t have more than one of the same type of ISA active in any one tax year though (you can’t have two different Cash ISAs for example), and you can’t pay in more than £20,000 total.

So each ISA can hold a different type of investment but the thing they all share in common is that they protect your returns fully from tax.

Which ISA Will Produce The Best Return?

Stocks and Shares ISAs (often referred to as Investment ISAs) have the potential to produce the best returns. I say potential, because the return you get is not guaranteed. Investing into stock market based investments carries risk and your capital can go down as well as up in value. The longer you invest for though, the greater the chance you will have of receiving a good return on your investment.

There are many ways you could open a Stocks and Shares ISA…

If you wanted to access an ISA with wide investment choice you could either go to see a financial adviser, or go directly to a company like AJ Bell, Hargreaves Lansdown or Fidelity.

On the other hand, if you wanted something where the choice was a bit more ‘guided’, shall we say, from a narrower range but still of very high quality, Vanguard or MoneyBox would be good options.

The Scottish Mortgage Investment Trust

So, what is this investment strategy that has produced such fantastic returns for investors of late? Let me introduce you to The Scottish Mortgage Investment Trust. This investment fund can be held in an ISA and has produced phenomenal results in the last five years. If the same pace of growth continued for another two years, they would make anybody who has been paying in their maximum ISA subscription over that period of time, a millionaire.stocks and shares isa millionaire

Now it’s important for me to say right here that I am not making a recommendation for you to go out and buy this investment fund! Yes, I am a financial adviser, but what I’m saying here is not me giving you financial advice. You have to understand the risks of any investment and do your own research to ensure that you’re comfortable with the risks and that any investment is suitable. That choice is entirely your own.

This particular strategy isn’t new – it’s been around for many years. It was originally formed in 1908 and is now owned by the Baillie Gifford group. It has a long history of good performance, but it’s really rocketed in the last 12 months delivering a 110% return in that year alone. That is exceptional for an investment fund holding a number of different stocks. Individual stocks will sometimes produce returns like that, but it’s rare for diversified funds to do so.

In the last five years the fund has returned an average of 40% per year, and if that continued (which is a big IF), people paying in their maximum £20,000 a year over that period of time (£140,000 in total) would see their value reach £1,000,000 after just 7 years and 9 months.

What Is This Investment Fund?

What does it invest into? How does it differ from other popular investment strategies and how does its performance compare?

Well, to firt describe what it is, Scottish Mortgage is an Investment Trust.

An Investment Trust is a type of pooled investment fund which is closed ended.

Simply put, pooled just means lots of different investors’ money is pooled together and managed by the trust’s fund manager or managers, who make all the decisions on how the money is invested.

Closed ended means that there are only a specific number of shares available to buy, unlike the slightly more common unit trusts or OEICs (Open Ended Investment Companies), which are open ended and can offer an unlimited number of shares.

There are ways for Investment Trusts to issue more shares, but the different methods have their own limitations. Generally speaking, investment trusts are viewed as being higher risk than their open-ended counterparts for a couple of reasons:

One is that their closed ended nature is generally to allow the fund manager to take longer term, sometimes less liquid investment positions. The other is that Investment Trusts are allowed to borrow money to increase the size of their positions, which is called leverage or gearing.

That increases the risk because if the investment doesn’t pay off and the value falls, not only has capital been lost but the borrowing has still got to be paid back.

Scottish Mortgage invests into a concentrated selection of growth companies, with a bias towards technology. Its largest holding, at around 9% of the fund is Tesla, and that has of course contributed strongly to its stellar performance of late.

millionaire

If we were to compare it side by side with another popular strategy though, what do we see?

To illustrate this I’ve used the Vanguard LifeStrategy 100% Equity fund as a basis for comparison and this chart illustrates the relative performance of the two investments:

Scottish Mortgage vs Vanguard LifeStrategy 100% Equity Performance Comparison

Vanguard are of course an extremely good fund manager, known mainly for their index funds. I personally hold this Vanguard fund in my Stocks and Shares ISA.

The chart tracks comparative performance over the five year period between 22 January 2016 to 21 January 2021. You can see that the difference is quite stark and let me be clear, the Vanguard fund is no slouch! It’s delivered a return of over 90% in the last five years – 18% a year on a compounded basis. You wouldn’t have been disappointed with that, but the return from Scottish Mortgage has been quite incredible.

The Power Of Compound Interest

Now it’s worth pointing out here that the return on the graph says 415%, and you might be thinking ‘wait there, 415% in five years? That’s way more than 40% a year… that’s over 80% a year!’

Well, that is the power of compound interest my friends… Growth on your growth!

The 8th wonder of the world as Einstein called it. He who understands it, earns it, he who doesn’t, pays it.

What About The Difference In Risk?

Let’s put this into context…

This chart shows the risk rating given to each of these funds by Financial Express as at 21 January 2021:

Scottish Mortgage vs Vanguard LifeStrategy 100 – FE Risk Comparison

Financial Express have given Scottish Mortgage a risk score of 127, and the Vanguard fund a risk score of 79. That score is based on a comparison with the FTSE 100 index, which would be scored 100. So what this is saying is that if the FTSE fell by 10%, Scottish Mortgage would be expected to fall by more than that, but the Vanguard fund would be expected to fall by less than that.

That’s not surprising considering the very different make-up of the two funds. Scottish Mortgage holds a concentrated of around 50 to a maximum of 100 stocks, some of which are private unlisted companies.

Vanguard LifeStrategy is an index fund; it holds around 7,000 stocks, all of which are publicly traded.

So although both funds invest into stocks, one is more diversified and lower risk than the other.

The big question is, can Scottish Mortgage carry on like it has been?

Surely, the big American tech boom has to come to an end at some point? Well, yes it probably does, and Tesla is unlikely to storm up by 700% in value again in 2021, but the fund does hold some other exciting small companies.

The medical device manufacturer Tempus for example is doing some great things, as are automotive industry disruptors like Aurora and Convoy.

It is possible, but as I always say it isn’t a good idea to jump on bandwagons. You have to understand the investment and the methodology of the fund managers. You also have to know how the fund overlaps with other investments in your portfolio.

Never abandon your strategy and risk profile just to chase performance.

What Is The Benefit Of The ISA?

I don’t consider myself a stock market expert… I’m not a stock broker or a fund manager, but I would consider my an investment taxation expert. One thing I can say is that the value of the ISA shelter, if investors were to reach £1m, would be huge!

If we were to assume that someone sold their shares after reaching £1m having paid in £140,000, and those shares weren’t inside an ISA…

Assuming there was just a single capital gains tax exemption available, there were no reinvested dividends, no carry over reliefs, no initial costs to consider, the tax they might pay could be in the region of £165,000 – £170,000.

If they were held in an ISA though, that tax would be ZERO. Zip. Nothing!

That my friends, is the power of an ISA!

SO THAT’S IT!

If you want to learn more about building TAX FREE growth and income, not just from ISAs but through other methods as well, subscribe to my YouTube channel here. I post videos every week to help you on your wealth building journey.

Until next time guys, stay savvy.

Chris.

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