There are few times when it doesn’t make sense to make use of the ISA wrapper to make use of your annual tax free allowance for investments in cash, stocks and shares. In fact an ISA is just that, a wrapper which is put around an investment solely for the purposes of protecting the returns from the tax man.
Current ISA Regulations: How Many ISA Providers Can I Have?
A key problem with the current ISA regulations is that at any one time an investor can only subscribe to two ISA providers per tax year, one for a cash ISA and one for a stocks and shares ISA. While the ISA limits are quite enough for many savers at £10,680 per annum at the time of writing. The limit on the number of providers does present the investor with a number of problems.
In the first case, if all of a person’s investments are put into an ISA, this means that the entire year’s investment allowance will be concentrated in the hands of a maximum of two institutions. This could have disastrous consequences should the institutions managing your investments run into financial difficulties. Recent history would seem to suggest that this is not a situation which is out with the realms of possibility.
On the positive side, an investor may subscribe to different ISA providers in each new tax year thus allowing a greater level of diversification to be made over a number of years. However, the investor can still only subscribe to a maximum of two providers per tax year.
Fund Diversification: The Need to Seek Multiple Fund Providers
While many ISA providers will offer a large range of funds to invest in and allow multiple funds to be held with the specific provider simultaneously. Not every fund provider will provide access to every sector or geographic region. This is also the more relevant if looking to invest in specific or specialist areas such pharmaceutical funds, ethical funds or natural resources.
Given that one can only subscribe to a single stocks and shares ISA provider in any single tax year, the result may be either an artificially lower level of diversification as the investor sticks to the funds offered by the ISA provider. Alternatively, the investor may seek to hold funds with an alternative provider but forego the ability to hold the investment in the ISA wrapper.
As such, in most cases it will make sense to protect an investment in cash or stocks and shares in an ISA wrapper. However, the current ISA regulations also encourage investors to concentrate their assets in the hands of a much more limited number of funds and institutional providers. So in managing a portfolio of investments, it may be worth holding a portion of one’s assets outside of the ISA wrapper so as to benefit from a greater level of both institutional and fund based diversification, even if there is a tax cost involved.
Frank Smith - Frank Smith currently works as an full time industry analyst for a well known construction company in Lincolnshire. In his spare time, ...
