Three great vehicles for your savings

Last Thursday I explained how fund managers can take more profit out of your hard earned savings than you do. I also explained that it is now very easy to take matters into your own hands and manage your own money.

You should not be daunted by this. If you set up an online dealing portfolio your money will be safe in the deposit account. And remember this: you don’t have to get everything right. All investors have some winners and some losers over time, what counts is the aggregate performance over the long term. If you start to manage your own money, the one thing that is certain is that you will save yourself the charges that would otherwise be skimmed off by fund managers. Dealing costs aside, this alone can save you thousands of pounds over your lifetime.

Last week I recommended you to take a good look at the websites of three of the leading online providers: Barclays, TD Direct Investing, and The Share Centre. If you have done so, you will notice that they offer a choice of account. In my opinion you should ignore all of these except three.

These are the basic share dealing account (Barclays’s ‘Market Master’, TD’s ‘Trading Account’, Share Centre’s ‘Share Dealing’); the Isa account; and the Sipp. Today I want to explain each of these.

Share dealing account

Once you have followed a few simple steps and opened an account (if you telephone the broker they will talk you through it) you will then need to transfer some money into it. Upon entering your password you will be able to view your account online at any time. As soon as your cash is available you can start investing in shares, bonds and all sorts of other types of investment.

In a future article I will tell you which of these investment types I believe you should favour, but by opening your basic share dealing account you have opened up a world of investment opportunities and you can buy and sell as you please.

Share dealing services will not give you any advice, these websites simply act as an ‘execution-only’ service. For more information on this take a look at this helpful guide.

Of course, there are dealing charges – and you may also find that there are some annual ‘administration charges’ or ‘inactivity fees’. These are usually minimal, but they do vary from one provider to another, so it pays to shop around for the best overall deal.

One wrinkle, by the way, that is quite common is a ‘frequent trader discount’, or some such arrangement that gives you discounted dealing rates if you trade regularly. You should not be unduly persuaded by such an offer. Remember that it is in the interests of the broker that you deal as often as possible. However, it is probably in your best interest that you do exactly the opposite.

Once you open an account please under no circumstances think of yourself as a ‘trader’. I hate this term, which frankly conjures up City boys in white socks.

With your online account you will be an ‘investor’ and there is a world of difference. Investors make money by placing their money in enterprises that are able to generate a financial return – a successful business for example; traders make money – or try to – by outwitting other traders in what is essentially a ‘zero-sum’ game.

In your share dealing account any income that you receive and any gains that you make are liable to tax, but this is not the case for Isas and Sipps.

Individual savings account (Isa)    

An Isa is a separate account that need not be declared to the tax man. There is an annual limit to your contributions (£11,280 for the 2012/13 tax year). Although you can choose to put up to half of this into a separate cash account, you are allowed to put the whole lot into shares. Dividend income is received after 10% tax has been withheld, but otherwise there is no further tax to pay on either income or capital gains. So this is a very tax-efficient vehicle and you can take your money out at any time, although you cannot then put it back in again unless as part of your annual allowance.

The one drawback is that you are only allowed to hold certain investments in your ISA. The government wants you to use your Isa to save for retirement and it does not want you to lose this money. Consequently it decrees that you can only hold certain investments that it believes to be safe, and that unfortunately excludes many small companies.

For more details of the rules, go to HMRC’s website.

Self-invested personal pension (Sipp)

A Sipp is another vehicle for your retirement savings. The main attraction is that you receive tax relief on contributions, up to a maximum of £50,000 per year. What this means in practice is that if you put £80 into your Sipp, the government will add another £20, and if you are a higher rate tax-payer you will receive further relief on top of this. You can hold a very broad range of investments in a SIPP, and investment returns are tax free.

But while putting money into a Sipp is attractive, the drawback comes when you want to take it out. As with any other pension you can take 25% of the value of the SIPP as a lump sum from the age of 55 onwards, but with the remainder you must either buy an annuity or take the money in the form of a ‘drawdown’.

One bit of good news is that when you die – any assets left in your Sipp can be passed on to your family.

In summary you should not put any money into a Sipp unless you are really certain that you can afford to leave it there for your retirement. You should also remember that Sipp rules in the future will not necessarily be as they are today. The government has a nasty habit of moving the goalposts and since you cannot take your money out of a Sipp before retirement you are at its mercy.

So there you are – three different types of investment account that you can use for your DIY investing. Have a think about which account is best for you and next week I will come to the important matter of your investment choices.

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

Please note that Fleet Street Publications Limited and its sister company, MoneyWeek Limited, has a relationship with The Share Centre through its subsidiary 0800 Shares and also by introducing investors to the Share Centre. Fleet Street Publications receives commission in connection to trades executed via the 0800 share dealing service and for introduced accounts. 0800 Shares is an appointed representative of Fleet Street Publications Limited which is authorised and regulated by the Financial Services Authority. Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions.