The Individual Savings Account, or ISA, was introduced in 1999 as the government’s primary tax-advantaged vehicle for adults outside pensions. Now one in three adults have an ISA, according to HM Treasury, and this financial year investors have a £7,200 allowance to put into a variety of funds, trusts, stocks and shares.

‘An ISA should always form part of anyone’s portfolio or wealth planning,’ says Vijay Vithlani, IFA with Best Advice. ‘It is helpful for all taxpayers, particularly in investment trusts (ITs) as dividends are not taxed in the hands of the ISA investor.’

Secure future
A package of reforms for ISAs came into effect this April making them available indefinitely (they were originally guaranteed to run for ten years up until 2009). Savers are now allowed to transfer money previously held in cash ISAs into stocks and shares ISAs, Personal Equity Plans (PEPs) have become stocks and shares ISAs and the Mini/Maxi ISA distinction has been removed. The reform also saw the annual ISA allowance going up to 2008-09’s £7,200, £3,600 of which may be saved as cash (with a different provider to the remaining £3,400 in a stocks and shares ISA, if the investor desires).

The tax benefits of an ISA comprise a Capital Gains Tax (CGT) exemption, so that gains made on the ISA when it is cashed in will not be taxed (the rate at the moment is 18 per cent). ISAs are also advantageous from an income point of view for higher-rate taxpayers as tax on dividend income is charged at ten per cent rather than the usual 32.5 per cent.

What are IT ISA schemes?
Around 40 IT ISA schemes are on the market this year. These schemes are run by investment management houses linked to the IT portfolios they run, to encourage people to invest their ISA allowance into these trusts. The investment houses basically provide the ISA wrapper, usually at a minimal cost, and allow investors to hold their trust or trusts within the tax-free environment.

‘In our scheme, you can put any of our investment trusts in and in any combination,’ explains James de Sausmerez, head of investment trusts at Henderson Global Investors.

This means that, in the case of Henderson, you can use your ISA allowance to spread across up to 12 trusts.

De Sausmerez explains that ‘Across our range we have the Henderson Diversified Income trust at one extreme, which is a very low-risk, fixed-interest trust. It is invested in secured loans and things like that, to give you a very good yield but not much on the capital side.’

Then he points out that, at the other end of the scale, the investor could go for something with a higher risk and a higher potential for growth, such as Henderson TR Pacific or Henderson Smaller Companies.

Your flexible friends
The variety which ITs offer in general is the main reason many investors are interested in these vehicles for their ISA according to the managing director of SVM, Colin McLean. ‘You get this wide range of trusts in the IT world and some of the specialist ones are very interesting to hold longer term. People are keen on the range they can access.’

ITs also make good ISA investments for the same reasons that they make good investments in general, says McLean. ‘Often these trusts have more flexibility than open-ended investment companies (OEICs) to gear up and catch more of the upside of markets, or to go into some slightly more esoteric areas. So people who fundamentally like these things about ITs and feel they are a good investment longer term will be interested in them for ISAs.’

Vithlani agrees. ‘You can use unit trusts or ITs in an ISA, but an IT can often offer specialised investment and we also tend to tell clients that if they are a bit more open to risk there are some ITs out there that they might want to look at.’

McLean holds his own ISAs within the SVM IT ISA scheme, and points out that savers can select a combination of the house’s trusts. ‘People also like the fact that there is more profile attached to the managers and the board and the level of reporting and explanation is higher. For people who like to look at reports they get more information than they do for open-ended funds.’

Cost counts
Another factor which attracts ISA investors to IT ISA schemes is the lower management cost of ITs. Most schemes have no initial or annual charge and purchase costs of £2.50 to £15 and/or 0.2 per cent to one per cent.

If the investment house levies a charge for the wrapper, it is generally very low. Henderson charges a £25 one-off fee. ‘If you had several years worth of ISAs with us, the charge is still only the £25,’ explains de Sausmerez. ‘For one year that’s pretty competitive, once its two years it’s getting very competitive and once you have four years you’re really laughing.’

It is possible to put use ITs for ISA savings through a self select ISA. As ITs are listed, you can buy the wrapper from an online broker and then buy and sell ITs as you would normal shares.

‘The difference between going with an online ISA from, say Barclays Stockbrokers, and purchasing from the investment manager who runs an ISA scheme is really cost’ says James Budden, marketing director at Witan Investment Trust. ‘We charge a one per cent dealing fee and then it really depends on what Halifax or whoever charge, perhaps £17.50, as a flat dealing fee.’

The extra you would get for paying one per cent of your £7,200 allowance to purchase an IT through its manager instead of with an online broker is the fact of being an enfranchised shareholder. ‘Buying through a broker results in being a nominee shareholder through that broker, which means that you may not get to vote in AGMs, receive accounts etc. Many IT investors value the involvement being a shareholder gives them,’ points out Budden.

The regular saving option
Another bonus of IT ISA schemes is the “pound cost averaging”, which can be achieved through saving on a monthly basis. With markets going up and down, saving on a monthly basis helps, as the price that you pay for your shares averages out, the pricier cost of shares in your IT when markets are high being cancelled out by the lower
costs in downturns, hence “pound cost averaging”.

De Sausmerez argues that ‘People are reluctant to invest in the markets at the moment and in our scheme and others the pound cost averaging is quite good. I suspect a lot of readers are sitting wondering if this is the right time to be doing anything in the markets, but ISAs are long-term investment vehicles and short-term movement shouldn’t worry you too much if you are investing on a ten- to 20-year view.’

The minimum monthly saving level with many IT ISA schemes is £50 or even less. ‘Gartmore’s IT savings scheme products – ISAit and SAVEit – are flexible and competitively priced,’ explains Gartmore’s head of ITs Melissa Jones. ‘They do not charge an initial fee, unlike some other providers, there is a £50 minimum investment and last year the lump sum and minimum transfer values were reduced from £3,000 to £1,000.’ All of Gartmore’s trusts can be accessed through the ISA scheme.

Extra choice
A key point to remember with IT ISA schemes is that it is possible to play it safe with a lower risk trust from the house that you chose for your ISA, and move into higher risk trusts later, depending on how the markets go. As Colin McLean points out, in some ways ITs have more scope for risk than open-ended funds, with their freedom to gear up and sometimes unusual investment remits.

However, with so many houses offering a number of trusts, going with a house you have confidence in could supply all the variety needed for many years of ISA investment.

As McLean points out ‘Most groups have a range of diversified trusts so sticking with an individual group would give you the range that you need. You don’t necessarily need to pick trusts from different groups.’