Not sure if an ISA is for me...

A question about : Not sure if an ISA is for me...

Hey there,

I'm a student and I'm just starting to buy some investments. I was planning on buying some Index funds, but I'm unsure on whether it'd be worth putting it in an Investment ISA.

All of the sites I can find have various charges associated with setting up an ISA with them, some are percentage on investment, some are flat rates. I'm not going to be investing a substantial amount to begin with (I'm a student after all) so I'm worried that the extra costs would cannibalise my initial investments.

Looking into it more, I was wondering if this is a valid approach: I would invest 'naked', as in not in an ISA wrapper, for now. I would do this until the value of the investments was approaching the threshold for becoming eligible for Capital Gains Tax. I would then sell off my investments, and repurchase them within an ISA, them now being large enough to justify the increased costs.

Any information on this would be greatly appreciated
Cheers!

Best answers:

• Most low cost platforms have the same charges for ISAs as they do for unwrapped investments. If you want to put a small amount of money into index trackers, then the cheapest place to do so is probably Charles Stanley Direct, who charge 0.25% per year with no charges to buy/sell funds.
• ISAs are worth having if the benefits over the long term outweigh the costs in the long term.
  If you don't need ISA protection because you're not making capital gains and you're not a high rate taxpayer who has to pay tax on dividends received, then the advantage of having an ISA is pretty limited - at least in means you don't have to keep records to prove that you have no gains taxes to pay. The other benefit is using up a current year allowance that would otherwise be lost. If you don't have enough money coming in to max out all your future years' allowances anyway, you can just use a later year allowance to make the ISA contribution eventually, instead.
  So, no big deal if you don't use an ISA. But as masonic says, many providers don't bother to charge any significant extra amount for using an ISA wrapper. If they will give it you for free, there's no downside.
  Having said that, there is one potential downside of using an ISA if your investing is getting advanced. If you're investing in companies or funds or ETFs denominated in foreign currencies, the foreign currency proceeds from dividends or sales cannot be held in an ISA and have to be converted back to GBP. Then when you buy another one you have to convert back to that currency again and it costs you yet more commissions. So for some people, an unwrapped account with a multicurrency cash account in it is more efficient with an ISA that only has a cash account.
  That's completely beyond the scope of what most people do though. Generally if you were investing in a US or European index you would just buy one priced in pounds and then the fund would do whatever conversions it needed for its investment strategy after it had taken your pounds, and it would give you back pounds later. So , I only mentioned foreign currency investing as a quirk that may be relevant at some point much further down the line when your portfolio changes. For some people it would mean they specifically avoided an ISA, but everyone else would just grab the ISA if it was free.
• Thank you! This is all very useful advice, especially the potential downside of an ISA in the long run, thanks for that.
  Looking into Charles Stanley it does look quite good. .25% per annum is the only cost as you said, nothing for trading and nothing extra for it being in an ISA. However I may go for a FTSE 250 index tracker from HSBC (I would link it but it seems newbies aren't allowed!). That one has a annual cost of .17%. It's not within an ISA but since I wouldn't be dealing with any tax at this point I think I may go with it. The Charles Stanley one looks like a good option to consider later down the line. Thanks guys!