Joe McGrath evaluates industry opinion on the best way to choose your ISA.

Those new to the world of ISAs may look at the myriad options with some degree of trepidation. However, the method of choosing the right product is actually relatively simple if done methodically and with care.

First of all, those new to ISA investment should consider their investor profile. For example, would they be prepared to risk some or all of their capital in exchange for the potential for higher gains. If the answer is no, a cash or capital-protected ISA is probably the best way forward.

Financial planners recommend that investors take the time to go through the small print and look closely at the terms relating to any ‘special bonuses’. These can sometimes turn what seems like a decent offer into a longer-term disappointment. It is also worth considering the goals for your investment. Are you saving for a regular income or saving for retirement? These considerations will all have an impact on product choice.

Help from the web
Sue Concannon, managing director of Halifax Share Dealing, recommends looking at comparison websites in conjunction with provider websites: ‘There are a number of ISA selector tools online that it pays to look at and which can provide the necessary information required to make an informed choice.’

Asset allocation is another key consideration – more specifically, that the investment chosen is in line with an investor’s attitude to risk.

Sophie Lenton, marketing manager at Skandia, says that when selecting an ISA, the first thing to consider may be whether you want a cash or stocks and shares product. ‘Both are widely available but assessing your attitude to risk is a vital step in building your investment,’ she says.

Those happy to risk capital may be best suited to a stocks and shares ISA. For this to be beneficial, most financial advisers say that a longer-term approach is best, so it would be preferable not to withdraw the money for at least five years.

Henry Denne, head of private clients at Punter Southall Financial Management, advises that the chances of losing money in a stock market-based investment are greatly reduced if you are prepared to invest for the medium term of at least five years.

A recent poll by TD Waterhouse found that over 90 per cent of investors don’t fully understand the benefits of a stocks and shares ISA. James Daly from the company’s investor centre says that this is partly because the capital gains bonuses of ISAs are underestimated.

He explains, ‘Although the benefits of a stocks and shares ISA will be greatest for an investor making significant capital gains, they can also be a cost-effective way to make regular smaller contributions over the longer term.
‘Investors rarely make capital gains over their allowance in consecutive years, but smaller gains in a number of positions can add up to a large profit.’

One of the largest providers of stocks and shares ISAs is Fidelity through its Funds Network platform. It has recently stepped up marketing to attract new custom, including a winter ‘sale’ for 30 of its most popular funds on the platform, removing all upfront fees.

Rob Fisher head of UK personal investments at Fidelity International, says the new burst of marketing is representative of a return of investor interest in ISAs. He explains, ‘We have a couple more launches planned in February and March. We will be launching another new fund and some more tools. The number of people investing in stocks and shares ISAs had plateaued in recent years, but it is becoming an increasingly popular product once again.
‘We have continued to refine how we can help customers make their decisions. We are going to be putting a lot of promotion behind ISAs this year as the value of holding investments in ISAs is likely to increase.’

Those in the know
Investors who are more confident in their own ability to pick funds or shares may prefer to opt for a self-select ISA. These are offered by a number of stockbrokers and financial advisers and allow individuals to get the tax benefits of an ISA while permitting them to choose their own investments at the same time.

For those deciding to opt for this pathway, using online tools from fund ratings agencies can be a good way to
spot funds that are yet to fulfil their potential and that may do well in the years ahead.

Jackie Beard, director of fund research, UK at Morningstar, says that there is a handful of funds that are very high rated but did not have a great year in 2009.

She explains, ‘There are ten elite-rated funds that, towards the end of 2009, could be found in the bottom quartile of their respective categories, but which all have the right ingredients for a reasonable expectation of outperformance over the long term.’

Before choosing a self-select ISA, however, the risk implications should also be considered. Adrian Lowcock, senior investment adviser at Bestinvest, explains, ‘It is important to consider how much work you have to do to research and identify the companies in which to invest. There are management charges for the ISA wrapper and transaction costs for the investment for buying and selling.’

Shopping around for the best product has never been more important, as many providers have launched incentives, with business levels expected to be up this year.

Sherry-Ann Sweeting, marketing manager at Scottish Investment Trust Savings, explains that the detrimental effects of high charges are even more noticeable in times of difficult market conditions.

She says, ‘Investors with large ISA investments can make sizeable savings in charges by choosing their ISA provider carefully, paying particular attention to whether the charges are percentage based or a fixed rate or capped charge.
‘We all know that past performance is not a guide to the future, and market movements are something over which investors have no control. However, charges can be as material to returns from an investment as the performance of the fund, and they are something over which that the investor does have control – in their selection of product and provider.’

Final pointers
Aside from product specifics, ISA investors should remember to invest early each tax year to ensure that the money is held in a tax-efficient environment for the longest possible period. This year, the over-50s can invest up to £10,200 before 6 April. This higher allowance will be available to all other investors from the new tax year.

Once you have gone through the many options available and have made a decision, you may wish to confirm your choices by looking at some of the online ISA calculators. MoneySupermarket.com, ISAs.com and BeatThatQuote.com have a vast range of ISA ranking and planning tools to help verify your decision.

Failing that, you may wish to look at the websites of individual ISA providers, some of which offer more complex planning tools. Good luck!