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Stocks & Shares ISAs Find the cheapest platform

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It's a new ISA year and this is a brand new guide to getting the cheapest stocks and shares ISA. Every adult has an £11,880 allowance for 2014/15 - find out how to take full advantage.

This guide will help you decide whether you should use a stocks & shares ISA, tell you which are the cheapest providers, and give tips for those who are new to investing.

This is the first incarnation of this guide. Please suggest any changes or questions in the Investing in a stocks & shares ISA discussion. Thanks to Gavin Haynes from Whitechurch Securities for fact-checking the guide.

Stocks & shares ISAs: Need-to-knows

1 What is a stocks & shares ISA?

Everyone in the UK over 18 has a £11,880 ISA allowance. You can choose to use all of this for a stocks & shares ISA if you want, or you can put up to half of it in a cash ISA and the rest in a stocks & shares ISA.

It may still be called an ISA, but a stocks & shares ISA is very different to a cash ISA, which is simply a savings account you don't pay tax on. With a stocks & shares ISA you're investing. This could be in things such as:

Corporate and government bonds. You basically lend your money to a company or a government in return for interest (don't confuse these with fixed-term bonds, which are basically savings accounts held for a certain period of time)

Shares. You invest in individual companies. Owning a share is like owning a brick in a house wall. If the price of the house (company) goes up, so does your brick (share), and vice versa.

Funds. Most people buy through funds. These can include bonds, shares, a mixture of the two, or in some cases, cash. Most funds have a specific theme, around which all the investments are based. Read more on funds.

2They're tax-efficient, but not always tax-free

It's very important you understand what the tax breaks are and whether they really matter to you before you decide to use your ISA allowance for investing.

Unlike the clear-cut tax gain of a cash ISA, stocks & shares ISAs help you save some tax, but not all...

A. You don't pay capital gains tax (CGT) on gains made within an ISA - great if you exceed the £11,000 annual CGT allowance.

CGT is a tax you'll have to pay on the gain you make when selling things such as shares, a second home (you donít pay capital gains on selling your first home) and jewellery.

So if you buy shares at £1,000 and then sell them for £1,500, youíve made a £500 gain. You might then have to pay tax on that. But itís important to understand that...

Youíre allowed to make £11,000 of gains this tax year (2014/15) tax-free outside an ISA. So you would ONLY gain using a stocks & shares ISA in a year where you were making total gains over £11,000.

Find out more about how CGT may affect you.

B. Dividends are taxed at 10% in an ISA - but only higher-rate taxpayers gain.

There are two ways you make money from investing. One is when the shares increase in value and then you reap a nice little profit when you sell them. The other is when they pay dividends.

Dividends are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you - it could be on a regular basis or as a one-off. And just like interest on savings account, dividends are taxed, at 10%. Outside an ISA, basic-rate taxpayers also pay 10%, while higher-rate taxpayers pay 32.5%. So...

Basic-rate taxpayers donít get any tax gains on dividends from being in an ISA, only higher-rate taxpayers do.

Find out more about tax on dividends.

C. You don't pay any income tax on interest from corporate bonds in an ISA.

With corporate bonds, instead of investing in a companyís success, youíre effectively lending money to it for a set time. In return, it'll have to pay you interest.

You're taking the risk that it won't give you the money back, so it isn't risk-free. But the good news is...

If you've got corporate bonds, or bond funds within an ISA that pays out interest, you don't have to pay any tax on it.

Find out more about investing in corporate bonds.

Still not sure? It's time for a table on the tax benefits of a stocks & shares ISA...

Will you benefit from using a stocks & shares ISA?

Capital gains tax < £11,000 Capital gains tax > £11,000 Tax on dividends Income tax on bonds
Non-taxpayer
Basic-rate
taxpayer (20%)
Higher-rate
taxpayer (40%)
Additional-rate
taxpayer (45%)

3Is investing right for me?

It's really not a question we can answer- it all depends on your personal circumstances and the amount of risk you're willing to take. But as a rule of thumb, you should invest for at least five years. This allows enough time to ride out any bumps in the market that might see you make a loss on your money.

As such, if you're looking to use your money within the next couple of years, you should probably stick to cash savings such as a cash ISA. See the Top Savings and Top Cash ISA guide for more.

Itís very important to understand that thereís no such thing as the best stocks & shares investment.

Over the long run, historically stocks & shares have outperformed money in savings accounts. But that's no guarantee they'll do so in the future.

Remember, investments can go down as well as up.

4Should I use my cash ISA allowance or invest it all?

It depends whether you gain from the tax breaks above and if you're willing to risk your money investing. In a nutshell:

- Basic-rate taxpayers who won't exceed the annual CGT allowance and are investing in stocks & shares - not corporate bonds - should ALWAYS max their cash ISAs first to take advantage of the tax benefits (leaving any remaining allowance for a stocks & shares ISA).

- Big investors, especially those putting money in corporate bonds, should ALWAYS max their stocks & shares ISAs (leaving no allowance for a cash ISA).

- Only investing? ALWAYS max your stocks & shares ISA as it's often cheaper to invest within a stocks & shares ISA.

5Don't confuse choosing funds with where you can buy your ISA

You can buy stocks & shares ISAs from different providers, but for the cheapest offers you want to do it through a website, often called a platform.

Investing in a stocks & shares ISA is a two-stage process. First you need to pick which provider to buy your ISA from, then you need to decide what investments to put in it.

It's like buying bread in a supermarket. You first need to pick where you want to buy the bread from (decide which platform to use), then choose what bread you want to buy from there (your funds).

You'll be charged both for using the platform and buying the funds. To stretch the analogy somewhat, imagine each supermarket charges a different price for its shopping bags.

Some supermarket bags are cheaper than others, but the ones that have the most expensive bags may be the ones that sell the bread the cheapest. So it's a combination of the two factors that needs to be taken into consideration.

Note that while the platform fee is charged by the platform you choose, the company running the funds will be charging you for the funds.

6The allowance will jump to £15,000 on 1 July

Since 6 April, everyone's been able to put £11,880 into a shares ISA (£5,940 into a cash ISA).

Yet from 1 July, ISAs turn into new ISAs (NISAs) with a £15,000 allowance, which can be ALL in stocks & shares or ALL in cash if you choose.

Here are the two questions we're most asked:

If I open a shares ISA now, what happens in July? You'll then be able to top it up to the full £15,000 if you choose, and it'll all count as your 2014/15 allowance.

Should I wait until July? If you want to take advantage of providers' April offers, you'll need to open your shares ISA now and not wait until July.

7Drip-feeding money in over time reduces risk

It's tempting to try to time the market, but it's almost impossible and even the most experienced investors get it wrong. By pulling out of the market as soon as a share dips or trying to second-guess when a share will reach its peak, you could lose out on sharp recoveries or see the price go down again.

Instead, you should invest on a regular basis - in investment lingo this is called 'drip-feeding' - to smooth out any ups and downs. This will give you an added benefit of something called 'pound cost averaging'.

This is how it works:

If you invested a £10,000 lump sum and bought shares valued at £10 each, you'd have 1,000 shares.

If you bought £5,000 worth of the same shares per month over two months (amounting to 10,000 overall), you'd buy 500 shares in the first month.

But if the share price went down to £9.50 in the second month, you'd be able to buy 526 shares, as the shares are at a lower price.

So, rather than your full £10,000 investment being affected by the drop in share price, only half of your money drops in value.

In this example, a lump sum of £10,000 buys 1,000 shares while two payments of £5,000 buys 1,026 shares. Smaller investing on a regular basis means any drop in share price wont be too noticeable.

8Use your allowance by 5 April 2015 or lose it

You must save or invest in your stocks & shares ISA by 5 April, the end of the tax year, for it to count for that year. Crucially, any unused allowance doesn't roll over - so if you don't use it, you lose it forever.

Any savings or investments which stay within the tax-free ISA wrapper will continue to earn interest and reap the tax benefits until you withdraw the money.

So it's possible to have substantial amounts invested within ISAs: well over £100,000 since ISAs began in 1999.

9Understand the charges of a stocks & shares ISA

Both the platform and the funds you invest in will cost you money. The two biggies to look out for are:

Platform charge. It's as if you have to take a supermarket's bag, and some charge you 50p for it and others charge you 10p. This can either be a flat fee (best for high investors) or a percentage of the value of your funds (the larger your funds, the more it'll cost you).

Fund manager charge (also known as annual management charge). Then you'll also be charged for everything you put in that bag - the funds you invest in. This is the charge by the actual manager of the fund held within your stocks and stocks & shares ISA. This is always a percentage and can typically vary from 0.1% - 1% per fund, depending on which fund youíre investing in.

There are other charges you need to look out for. Read about other charges.

10Is your current stocks & shares ISA overcharging?

Once you've got your head around the various charges, it'll be easier to work out whether your current stocks & shares ISA provider is overcharging you.

A platform might have been cheap at first, but new charging structures mean it may no longer be.

Hargreaves Lansdown, the biggest provider, is now one of the most expensive.

We're telling you this because we know many people have their ISAs with it. But its new 0.45% platform fee means that for many, it'll no longer be the cheapest platform.

For example...

If you have £20,000 invested with Hargreaves Lansdown, youíd be paying £90 a year in platform charges. This compares to £50 with Cavendish Online, or a low one-off fee of £25 with iWeb.

The larger your investment, the bigger the difference. £100,000 invested with Hargreaves Lansdown would cost you a whopping £450 a year compared to £250 with Cavendish Online.

The one time it does pay off though is for those lucky enough to have huge investments. Read more on Hargreaves Lansdown and other pricey platforms.

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Best buys: New stocks & shares ISA providers

The best buys have been calculated based on their current platform charges. Obviously, if you're holding funds over five to 10 years, charges can change.

If you want to invest in specific funds, try to check their charges on different platforms, as weíve just taken an average basket of funds for our calculations. Find out how we did our analysis.

AXA self investor

AXA Self Investor The cheapest in the first year. It has no charges and it's free to transfer out after that, but doesn't have the widest range of funds.

  • Platform charge: 0% till May 2015 then 0.35%
  • Average fund manager charge for our basket of funds: 0.68%
  • Min ISA deposit: £50/month or £500 lump sum
  • Transfer out fee: £0
  • Buying/selling funds: £0
  • Number of funds available: 1,000

If you open an AXA Self Investor stocks & shares ISA before Wed 30 Apr, there'll be no annual platform charges until May 2015. This makes it the cheapest platform overall for the first year of investing.

You'll want to transfer out before May 2015, though, as the platform charge rises to 0.35% - that's £35 if you invest £10,000. Before you move, make sure you've taken advantage of its lack of trading fees, as it could cost on your next platform.

If you know you're the sort of person who won't get round to transferring platforms, then this might not be the best option for you in your first year of investing. iWeb (see below) has a one-off account opening fee of £25, which could work out better in the long run.

iWeb investing

iWeb* Best for long term and infrequent trading

  • Platform charge: One off £25 charge
  • Average fund manager charge for our basket of funds: 0.7%
  • Min ISA deposit in ISA: £20
  • Transfer out fee: £25 per fund
  • Buying/selling funds: £5
  • Number of funds available: 2,000

If you know you're not going to bother to transfer out after the first year, then investing in AXA Self Investor (above) isn't going to be your best option as in year two you'll get hit with larger fees. If that's you, then iWeb would not only be best in the long term, but also in year one.

Unlike many other platforms, iWeb (which is part of Lloyds Banking Group) only charges a one-off flat fee for opening an ISA of £25. This is good if you want to stick with it for the long term, as thereís no further platform fee to pay. It also only charges £5 per trade for buying and selling funds.

Investing £10,000 with AXA Self Investor will cost you £35 in platform charges in the second year. But with iWeb's £25 one-off account opening fee, you could save £115 over five years.

Cavendish Online

Cavendish Online* Good for small investors and no fund buying charge so good for frequent traders

  • Platform charge: 0.25%
  • Average fund manager charge for our basket of funds: 0.71%
  • Min ISA deposit: £500 lump sum
  • Transfer out fee: N/A
  • Number of funds available: 2,000
  • Buying/selling funds: £0

For small investors, Cavendish Online has one of the lowest platform charges at 0.25%. So if you only investing £1,000, you'd be paying a tiny platform charge of £2.50 a year. If you stuck with it for 10 years, you'd then break even with iWeb's one-off £25 fee (assuming you don't make any additional deposits into the ISA).

This means you'll need to think about whether you'll be trading or not. While your platform charge will be more expensive with Cavendish Online, trading is free.

If you make more than seven trades a year (which would cost you £35 with iWeb), Cavendish Online works out cheaper. For fewer trades, iWeb beats it. If you only invest £1,000, making 10 trades in the second year would cost you £50 with iWeb but only £2.50 with Cavendish Online.

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Best buys: ISA transfers (all allow new money too)

Itís important to understand that you get your ISA from a platform, and within that platform, you can have lots of different funds.

You have two choices. You can keep the same ISA with the same platform and switch funds within it. Or you can move platform (to take advantage of lower platform charges), and either keep the same funds (if they're on the new platform) or have different funds in it.

If you want to use another provider, youíre going to have to do an ISA transfer.

Back to our supermarket analogy. You might have a favourite product that you buy at Sainsbury's, but when you start shopping at Tesco you realise that it doesn't sell it, so you have to buy a different product to replace it.

You have to weigh up whether you continue shopping at Sainsbury's to keep getting the product you like, or move to Tesco, hoping it has something you end up liking even more.

Here are our top transfer picks:

We've calclated our best buys based on their current platform charges. If you're holding funds over five to 10 years, these charges can change.

If you've got specific funds in mind, try to check their charges on different platforms, as weíve just taken an average basket of funds for our calculations. Find out how we did our analysis.

AXA self investor

AXA Self Investor No charges in year 1 but not widest range of funds

  • Platform Charge: 0% until May 2015 then 0.35%
  • Average fund manager charge for our basket of funds: 0.68%
  • Min deposit: £50/month or £500 lump sum
  • Transfer out fee: £0
  • Number of funds available: 1,000
  • Buying/selling funds: £0

If you open the AXA Self Investor stocks & shares ISA before 30 April 2014, there's no annual platform charges until May 2015. This makes it the cheapest platform overall for the first year of investing, even when transferring in.

For those transferring in who want to take advantage of this and are worried by the timescale, the funds don't have to have been received by AXA Self Investor on that date, but you do need to request to transfer to it by that date.

You'll want to transfer out before May 2015 as the platform charge rises to 0.35%, and if you don't it could cost you big. Keeping £100,000 with AXA Self Investor will cost you £350 in the second year in platform charges, compared with a one-off fee of £25 with iWeb.

Before you move, make sure you've taken advantage of its no trading fees in the first year, as it could cost on your next platform.

How to transfer. Transfers take up to four weeks. See full transfer details.

iWeb investing

iWeb* Best for long term

  • Platform Charge: £25 flat fee
  • Average fund manager charge for our basket of funds: 0.7%
  • Min deposit:£20
  • Transfer out fee: £25 per fund
  • Number of funds available: 2,000
  • Buying/selling funds: £5

Unlike many other platforms, iWeb (part of Lloyds Banking Group) only charges a one-off flat fee for opening an account of £25, regardless of how much you are investing with it. This is good if you want to stick with it for the long term and are transferring in a large amount, as thereís no annual platform fee to pay.

Investing £100,000 with it will save you £325 compared to investing with AXA Self Investor in your second year. So those who have chosen AXA Self Investor in the first year for its free platform charge, should consider moving to iWeb by May 2015 to take advantage of its one-off fee. Seven trades with AXA Self Investor cancel the platform fee on £10,000.

iWeb also offers a low trading charge of £5 per trade per fund, so you can buy and sell funds without getting stung. Although, trading with iWeb will be cheaper than trading with Interactive Investor (below), iWeb have a lot less funds to chose from, so if you're somebody who wants a diverse portfolio Interactive Investor may be a better option.

How to transfer. Transfers take two to three weeks. See full transfer details.

Interactive Investor

Interactive Investor* Much wider range of funds + mobile app + cashback

  • Platform Charge: £20 per quarter
  • Average fund manager charge for our basket of funds: 0.55%
  • Min deposit: £20
  • Transfer out fee: £15 per fund
  • Number of funds available: 7,500
  • Buying/selling funds: 2 free/quarter then £10 (£5 for 10+ trade/mth)

If you want a wide range of funds to choose from, Interactive Investor is a good alternative, it has a fixed £20 per quarter platform fee.

New customers will also receive up to £240 cashback in the first year with the platform, split £120 in trading credit (3 free trades a quarter) and up to £10 per fund transferred in in cash (max £120 in 12 funds) if you request to transfer by 30 April 2014. Existing customers will only receive £120 in trading credit.

Interactive Investor gives you two free trades per quarter, after this additional trades cost £10. The more you trade, the cheaper it gets - £5 for 10 or more trades per month.

If you know you're an active investor and are going to make 20 trades in the first year, it'll cost you £80 (20 free trades plus platform fee) with Interactive Investor, assuming you transferred over 12 funds. With iWeb it'll cost you £125.

In the second year you're invested with Interactive Investor 20 trades would cost you £200 (8 free trades, 12 trades at £10), compared to £350 (platform fee, plus free trades) if investing £100,000 with AXA-Self Investor, and £100 (20 trades at £5) with iWeb.

Though it's not cheaper than iWeb, unless you buy and sell loads of funds, it has the most funds of any of our best buys (over 7,500 compared to AXA Self Investor's 1,000 and iWeb's 2,000) and offers a mobile app. This makes it a good pick for those who like to have a diverse portfolio and wants to trade and check on your funds on the go.

Family members (must be at the same address and have same surname) can link their accounts so they only pay one annual fee.

How to transfer. Transfers take four weeks. See full transfer details.

iWeb investing

iWeb* Best for shares in the long term

  • Platform Charge: £25 one off charge
  • Min deposit in ISA: £20
  • Transfer out fee: £25 per fund
  • Dividend reinvestment charge: 2% (max £5)
  • Buying/selling funds: £5

If you want to invest in shares, iWeb is a top pick. It's got a one-off account opening fee of £25 and £5 per share trade, so it's good for long term investors.

AXA Self-Investor and Cavendish Online currently don't offer a share-dealing service, and Interactive Investor will allow you to buy shares within your ISA wrapper though the charges are the same as trading in funds (£20 per quarter platform charge and £10 per trade).

Investing with Interactive Investor in funds had it's advantage over iWeb due to Interactive Investors large fund portfolio, however if it's only shares you want to invest in then iWeb wins.

If you invest £10,000 with iWeb in shares it'll cost you the one-off fee of £25 and if you trade 10 times in the year this will add an extra £50 to your yearly charge. If you chose to invest with Interactive Investor 10 trades will cost you £100 (not including the transferring in cashback) - double the fee.

Please note iWeb is only our tip pick at the moment due to it's one-off account opening fee of £25.

In the future if it decides to change its pricing iWeb's position as our top pick may change. Please bear this in mind if you are thinking of transferring to it in the future.

How to transfer. Transfers take two to three weeks. See full transfer details.

Is my money safe?

No absolutely not. By definition you're investing in shares and stocks which means the value of your investment can go down as well as up at any point.

However, if you mean what happens if my provider goes bust, in other words, you've bought funds through a company and it goes bust, then yes your money is safe.

If a fund manager goes bust and owes you money, funds will be protected and are likely to be taken over by another manager.

You should check if funds are covered by the Financial Services Compensation Scheme - most funds managed by UK fund managers are - where you can claim compensation of up to £50,000 per person, per institution. Remember however, you wonít get any compensation just because the value of your investments falls.

New to investing - some tips for starters

We donít cover what to invest in because we never want to have told you to put your money in something and then you to lose money on it.

If we go back to the supermarket analogy. What weíre here to tell you is which supermarket is likely to be the cheapest, but weíre not going to tell you which bread to buy. But these sites do:

ADVFN - Live news, and lists of gaining and losing companies plus company by company performance charts, news and discussion forums.

Interactive Investor - Offers information, news & discussion forums.

Motley Fool - A wealth of company-by-company information including news, commentary and comparison of fund performance.

Citywire - Features financial information on companies, as well as a news source. Offers the chance to watch shares in a virtual portfolio if you sign up for an account.

If you're not sure how to invest and what to invest in, seek independent financial advice. Read the Financial Advice guide for more information.

Five Golden Rules to investing:

  1. The greater return you want, the more risk you'll usually have to accept.

  2. Don't put all your eggs in one basket. Try to diversify as much as you can to lower your risk exposure.

  3. If you're saving over the short-term it's wise not to take much risk with your money. It's recommended that you invest for at least five years. If you can't - cash is often best.

  4. Review your portfolio. A fund might be a dud, or a fund manager might leave, or you might not be willing to take as much risk. If you don't review your portfolio on a regular basis you could end up with a stocks & shares ISA losing you money.

  5. Don't panic. Investments can go down as well as up. Don't be tempted to sell or buy funds just because everyone else is.

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