The recent fee bomb dropped by Interactive Investor has caused many Monevator readers to think about a swift ISA transfer to other investment platforms. We presented our alternative picks here but what about the stocks and shares ISA transfer process itself? How tricky is it?

Well, there are a few things to think about, and because a fair wedge of Monevator readers are monogamous passive investors who don’t break up relationships unless they really have to, let’s do a quick guide to dumping your ISA provider.

Dear ISA provider… it’s not me, it’s you

The first thing to note is that a stocks and shares ISA can only be transferred to another stocks and shares ISA. That makes it slightly less flexible than a cash ISA, which can be emptied into a stocks and shares ISA if you fancy it.

That established, you have three options for extracting your ISA from the clammy hands of the unworthy:

1. Cash transfer

Your current platform sells your assets and transfers the cash directly to your new ISA provider. You choose new investments from scratch, making this option good for a brand new start, if things have got a little, ah, messy.

• Your ISA’s anti-tax armour remains unbreached.

• It should take about two weeks to transfer, but it could take up to six.

• You are out of the markets as soon as your assets are sold and until you repurchase a fresh batch. That could go for or against you. No one knows.

2. Stock transfer

The existing contents of your ISA are transferred intact to your new provider. In other words, all your funds and shares are handed over without being sold or repurchased. This type of ISA transfer is often referred to as an in specie transfer, or as re-registration.

• Again, your ISA’s tax status is not compromised.

• It should take about four to six weeks but it often takes several weeks longer.

• You remain in Mr Market at all times and are subject to his whims.

• You won’t be able to trade until the transfer is complete.

3. DIY sell-off

Of course, you can always flog your assets yourself and use the proceeds to open up a new account with another ISA provider.

• Your ISA’s tax powers are very much kyboshed in this scenario. ¹

• Transfer out fees are avoided, though perhaps not account closure charges. Also note some platforms will pay your transfer fees to secure your business.

• You’ll pay dealing fees to sell and buy anew.

• You’ll be out of the market for a few days.

Stock transfer: The nitty-gritty

Personally, I would use a stock transfer all day long. The annual advance of a market can occur in just a few days and I’d hate myself if I missed out.

However, there are a couple of potential snag-ettes to watch out for with the ol’ in specie manoeuvre:

• Contact your new provider and old provider to make sure they both play ball when it comes to in specie transfers.

• Check that assets in your old ISA are available in your new one. If not, then talk to your new provider. Otherwise, incompatible assets are likely to be sold.

• Different provider’s forms use different terminology to describe an in specie transfer. Check if you’re not sure which box to tick, and, whatever you do, avoid the box marked ‘liquidate’.

• Your old provider is likely to impose a transfer out charge – just one last pound of flesh before you leave. This is typically £15 – £25 per fund or stock. Some new providers will pay these fees for you. (Occasionally, as with Interactive Investor currently, they might be waived. It never hurts to ask!)

To do list

If your old provider’s ‘just one last chance’ pleas have fallen on deaf ears and you’ve identified your new dream partner then completing your stocks and shares ISA transfer isn’t much more daunting than filling in a form:

• Complete the ISA transfer forms provided by your new platform.

• Ask your new provider if it will cover your transfer out fees.

• Tell your old provider to close your account once the transfer is complete. You don’t want them pursuing you for inactivity charges.

• Cancel your old direct debit and relax.

That’s about all you need to know. I’ve got a couple of bullet points left in the tips-gun though so let’s fire ’em off:

• Your new platform should tell you when your account has transferred.

• You can transfer your current year’s ISA, although new money can only be added when the transfer is complete.

• ISA transfers do not count towards your current year’s allowance.

• You can transfer some or all of your previous years’ ISAs.

• You can even partially transfer an ISA. List the assets you’d like to transfer, though note that your old provider can refuse a partial transfer. You can’t partially transfer your current year’s ISA.

• Document all your holdings (names, ISIN codes, quantities held) before you transfer. Take a screenshot of your holdings sitting in your old broker. This will come in very handy should any holdings go astray during the transfer.

That’s it. We’re done. Happy transferring.

Take it steady,

The Accumulator

1. In other more boring words, the money you had tucked away in the ISA loses its tax protection.[↩]

Good reads from around the web.

I am soon going to sell shares in a private company I co-founded a few years ago and later left. The company has been pretty successful, not least because of the drive and talent of the people at the top, who remain good friends.

I believe selling now makes sense for all concerned, but I do so with a few qualms. Unfortunately, one of those is that it will trigger a capital gains tax event.

The sale of my shareholding will generate a significant five-figure gain, far beyond the £10,600 annual CGT allowance. Despite having a 5% or greater shareholding, it seems I don’t qualify for entrepreneur’s relief as I haven’t been employed by the company within the last 12 months. This means I’m potentially on the hook for 18% at the basic rate of capital gains tax, or 28% if I breach the higher rate bracket.

Tax avoidance is perfectly legal, and needless to say I’m engaged in reducing my CGT liability. For example, the market volatility since April has been kindly timed for me – whereas before April I was defusing capital gains on various shareholdings, now I’m carefully selling losers to offset the far bigger gain that’s coming due. (More on this next week).

I’ll probably also reinvest more into my current business this year, rather than draw too much income out of it only for that to inflate my tax bill.

Taxing matters

Despite my disquiet about excessive public spending, I’m not a survivalist nutter who believes the state should confine itself to pointing nukes at the Ruskies.

Everyone ought to pay their share of taxes, and I do.

I’m also aware that private equity firms and the like exploit the rules on capital gains tax to pay lower rates than their secretaries, despite often engaging more in City chinwags and financial chicanery than in real entrepreneurship.

But I have to say I am pretty miffed about the tax treatment of a private individual’s modest capital gains, whether on a company they started or on shares and the like.

The £10,600 allowance might seem a lot when you start investing, but once you’re into six figures (and you’ll need to be, eventually) it’s a joke. I’ve noticed that older investors are much keener on ISA-ing and SIPP-ing their stocks and shares than new investors are, and I’m sure this is why. Even I didn’t use tax-exempt wrappers until 2003, and I regularly regret it.

When I co-founded that business back in 2005, I put about one-fifth of my entire worldly wealth into it. More importantly, I gave up most of my other work, which slashed my income by more than 80%. We didn’t pay ourselves at all for a year, despite a six day week of 10-12 hours a day. When a salary did come, it began at less than I earned in my first (poorly-paid!) job out of university.

We took all the risk. We didn’t take a penny of State money, grants, or anything like it. Yet the State wants a share.

Fair enough, there is entrepreneur’s relief in some circumstances, but it doesn’t fit mine and I don’t particularly see why my own risk-taking should be penalised on technicalities.

And what about capital gains tax on everyday share investing?

Again, I am sympathetic to income redistribution, especially in this age of spiraling inequality. The rich will always get richer, and that’s ultimately unsustainable. Personally I’d do more redressing through inheritance tax, though I seem to be in a tiny crowd on that score.

In any event, taxing a small investor who gets a break is hardly going to curb the rise of the 1%, or prevent capitalism eating itself as Marx predicted.

It also does nothing to encourage a culture of saving and prudent investment. Rather, it encourages people to follow the herd into the next property bubble, given that capital gains made on your own home are entirely tax-free.

I have on my shelf a copy of Investment Made Easy, by Jim Slater. It was the first book on investment I ever bought, and it was published in 1995. Slater cites the capital gains tax allowance as £6,000.

That means the CGT allowance has gone up 77% in the 17 years since then. Sounds good, but let’s compare it to the CGT-free status for housing.

According to the Nationwide, the average UK house cost around £51,000 when 1995 began. After peaking in late 2007 at £184,000, the average price is now down to around £162,000. That’s still a gain of 217%, which means the CGT tax-free perk on housing has in money terms become much more valuable over time, compared to the CGT allowance.

Of course, CGT isn’t payable on homes at least partly because the government doesn’t want to slow down the market – and hence mobility, employment, and the like – by putting people off selling up.

But I’d still question whether our priorities are entirely in order here. At the least, an annual CGT tax-free allowance on other gains of say £20-30,000 seems appropriate.

In my case, the lack of ISA sheltering and the winners-and-losers nature of stockpicking means I’m not too badly off. I’ll be able to offset most of the gains, albeit at the cost of turnover and associated fees that would make The Accumulator dizzy. Ironically, my tardiness in sheltering shares over a decade ago is going to save me thousands of pounds.

But I think this is an unusual set of circumstances, and they probably won’t be able to help me next time I sell a business or similar. (I’m not that bad a stockpicker, and I’m not that rich!)

[continue reading…]

I’m very pleased to introduce this guest post by Pete Comley, author of the hit free eBook, Monkey with a Pin. (Now also available as an iTunes podcast). Take it away Pete!

“Over periods of five years, the returns from shares have historically beaten cash around 80% of the time. Over 10 years, this rises to about 90%, and for 20-year periods, it’s 98%. With odds like that, investing [in shares] for the long term remains one of best ways of building your wealth.”

The above comment from The Motley Fool’s “10 Steps to Financial Freedom” has become the accepted orthodoxy by most investors.

What’s more, we are now living in a period of amazingly low interest rates. Base rates are at their lowest level for hundreds of years.

So what is the point of holding cash?

In this post, I will argue that the superiority of shares is not as great as the finance industry would have you believe. In addition, cash does have some key benefits like cheapness (no charges), simplicity, low risk, and optionality.

Cash is not without its own issues, and I’ll discuss how to mitigate these.

However, it is my view that neither cash nor equities are likely to beat inflation over the next five years. This article discusses how I’m going to play the ‘bad hand’ we all seem to have been dealt.

The effects of financial repression

Firstly, why am I so negative about the coming years?

It is not because of the Euro crisis per se or the stalling Chinese (and therefore world) economy. It is the debt mountain everywhere.

History suggests that there is only one easy solution for governments to this debt mountain, and that is something called financial repression.

The UK government has a track record of using this solution since Napoleonic times. It does two things:

• Firstly, it creates high inflation to erode the real value of its debt.

• Secondly, it suppresses interest rates to ensure it has to pay as little as possible to service its debts in the meantime.

The Bank of England appears to be enacting this time honoured strategy. Using QE to buy government debt not only ensures rates stay low (for the time being) but also that at some point soon all that money supply is going to fuel inflation. The blue touch paper has been lit and the fireworks display is just starting.

Historically – i.e. the last 50 years – interest rates averaged about 2% above inflation. But this is probably not going to happen over the next 5-10 years due to financial repression. Instead, even the best interest rates are going to be lucky to match it.

Equities trading sideways and consolidating

So given my views on cash, why am I writing a blog post arguing its benefits over equities?

Because equities are not going to do much better,  in my view – at least not for a few years. We seem to be stuck in a sideways consolidation secular bear market, and have been for 12 years. These typically run for 13-16 years or thereabouts.

Source: Barclays Equity Gilt Study 2011. UK equity index without dividends but adjusted for inflation.

Until we break out of this into the next secular bull market (which would see the FTSE 100 make new highs above 7000), the average equity holding is going nowhere. A report by Deutsche Bank published in late 2011 estimated that the average net return of the stock market over the next decade will be barely above inflation (+0.6% per annum).

When is cash not cash

But this isn’t my main issue with the finance industries’ claim that equities outperform cash. I think their argument has some serious flaws, as I outline in my book Monkey with a Pin.

To start with, all the key comparative historical studies like the Barclays Equity Gilt Study and the Dimson, Marsh & Staunton data don’t use a measure of ‘cash’ that you and I think of as cash. They normally use something called a ’91-day treasury bill’. It is a wholesale instrument that’s unavailable to the average saver (unless you have a spare £1/2 million or so).

When they do attempt to compare with building society rates, they use accounts that no one else is using and are not representative of the market.

Since 1998, Barclays has been indexing against the postal Nationwide InvestDirect account. It pays just 0.2% (i.e. 3% below many instant access accounts). If you adjust for this alone, the gap between cash and equities narrows.

The missing 6%

As if this treatment of cash was not bad enough, in my book I also show that the average investor is losing 6% a year from their theoretical equity return.

The main reason they never achieve the projected returns that the industry promotes is charges – be they fund TERs, hidden charges, or just share trading commissions, stamp duty, and bid offer spreads.

You also have to factor in that on average, most private investors have a negative alpha (skill level), especially when new to investing.

Lastly, the theoretical return is usually based on measures that exclude survivorship bias, so that also drags down the actual return versus expectations.

When you add in this further negative 6% drag on equity investing and compare it with the real return on cash over the last ten or even 20 years, the comparison actually favours cash.

Cash vs equities scenarios

There are ways to mitigate this average 6% loss in equity investing, as I describe in my book. The key one is to buy and hold a very low cost passive index tracker, which gets your loss down to about 1% per anum.

However even after doing so, the actual equity return over the next five years is probably going to be less than inflation, if Deutsche Bank is right:

This means that the best-case scenario for both high interest rate cash ISAs and low cost tracker equity investments will not match inflation.

How to get the most from cash

Having debunked the industry brainwashing that holding cash is a completely stupid idea, let’s look at it in more detail and examine how you might best do so.

First, a big caveat: Many people will not do that well out cash.

In my scenarios above, many people will be lucky to get back any more than they put in, in real terms, if they pick the wrong ISA account (the fourth bar in the graph). But remember that I think the same will happen to the average share investor, too, by the time you factor in their missing 6% a year (far right bar above).

Indeed, the biggest issue with cash is that most people put up with receiving a much lower rate of interest than they could theoretically get.

It may hardly seem worth bothering to switch accounts for 1% or so more on the interest rate. However what most savers fail to realise is that due to compound interest, the impact is quite big, as the following chart illustrates:

We all live busy complicated lives. Although we seem happy to spend a lot of time researching exciting share opportunities, we are reluctant to spend a fraction of that effort on ensuring we get a good interest rate on our cash. Even if we start with good intentions, we often find a few years down the line that our introductory bonus rate has long expired without us doing anything about it.

Savings tip: Want to audit your interest rates? This handy tool from Which? enables you to easily check the rates on your old accounts.

How to be a rate tart

I’ll admit it, I’m a bit of tart. So what are the options I’m using (or have considered using) to ensure I maintain good rates on my cash?

1. For money I’m prepared to put away, I use fixed rate schemes for a year. They automatically write to me near the end and tell me it is expiring. That forces me to go online and compare the rate and if necessary switch provider.

2. I try and time my accounts so all the bonuses and fixed rate schemes expire at a couple of points in the year (so I don’t keep having to think about it). The March ISA season is a good expiry point to renew at good rates.

3. I am looking at using the free MoneySavingExpert Tart Alert tool. By registering the expiry date with it when you set up the account, it will text or email you six weeks before the end to remind you to switch.

4. I have looked at the Governor account. It is an intermediary website, which sends you alerts when your accounts interest rates decline and makes it easy for you to switch. Why have I not used it? A few reasons: It won’t take transfers in, it only takes fixed term deposits, it has a very limited choice of accounts (just five small building societies currently show offers), and the rates are below the best elsewhere (as Governor takes its cut).

5. I’m thinking about opening an Investec High 5 or High 10 account. These offer a rate that is equivalent to the average of the top 5/10 saving accounts, respectively. The main snags are you need a minimum of £25,000 to tuck away, and you also have to give 6/3 months notice, with no early withdrawals permitted. You can’t use it for ISA funds, either.

All in all, I am still likely to be using a manual process for accounts in the future, despite the potential financial innovations out there.

Tax doesn’t have to be taxing

Another issue with cash often overlooked in the comparison with equity investing is that of tax.

Few people pay much tax on their dividends or gains from shares because they are within their tax allowances, they are basic rate taxpayers, or else the shares are sheltered in tax-free wrappers like ISAs and pensions.

Compare this to cash savings, where many pay the 20% basic rate, if not higher rates of 40% to 50%.

The annual cash ISA allowance is (for some reason) just half the potential stocks and shares ISA allowance, amounting to £5,640. This – together with the fact that you can’t get the money out of an ISA and then put it back in – means that many of us have savings accounts where we’re paying tax.

Tax can massively reduce your returns, as the following graphic illustrates:

Sipping your glass empty

If this were not bad enough, those trying to hold cash within SIPP pension schemes typically receive near-zero returns on it.

There is a solution to this, however, which I use myself. That is to have a SIPP set up with a provider that allows you to put your cash in building society and bank accounts of your choosing. Admittedly they have to be postal-administered trustee accounts, which restricts your choice severely, but if you look at Investment Sense’s listings, you’ll see the rates similar to the usual best buy tables – indeed the current five-year fixed rates are higher than the comparative ISA ones.

A word of warning: Suitable SIPP accounts don’t come cheap in their running costs, nor in the set up charges for each building society account. You are probably going to need a pension pot in excess of £100,000 to make them truly worthwhile.

Spreading your risk

Any discussion of cash savings can’t pass without a reminder about the Financial Services Compensation Scheme. In the event of another banking crisis that threatens your cash savings, the FSA will cover you for up to £85,000 deposited with each banking group in the scheme.

To ensure you’re protected, you must understand which banks are part of which groups – see the FSA for full details. You must also check before you set up an account to make sure it’s covered at all – this is particularly important for international banks.

If you have more than £85,000 to invest, then you are going to have to open and administer two or more different bank accounts (which can significantly add to your hassle/costs in a SIPP, for example).

Optionality

Having looked at all these negatives, I’m sure many of you still think I’m mad bothering with cash. But the main reason I do so currently is optionality.

At some point in the next few years, I think there is a good chance that asset prices will mark a significant low point. If you go back to FTSE chart I showed earlier, there has to be chance that we’ll see another stock market low before we finish this secular bear market.

At that point, I want to have as much cash to invest as I can muster. I don’t want to be thinking that my portfolio has just declined 50% and the end of the world is coming. I want to be thinking positively like Buffet does in such situations. I want to be shopping in the biggest sale we’ll potentially see for another 20 years afterwards.

If I’m wrong and the FTSE does not put in a new significant low, I plan to invest when we break out of this sideways trading into the next secular bull market. At that point, the wall of cash out there is also going to pile in and drive stocks to new highs.

FTSE 20,000, anyone?

Concluding the case for cash

Holding cash at the moment is not a good idea, but in my view holding equities is potentially even worse.

I view cash as a short-term strategy to preserve my wealth in some form for the great potential opportunities to come.

So has Pete persuaded you to shake that equity monkey off your back? Or do you believe like me that now is already a good time to buy shares? Let us know below. (Note: I fully agree that cash is under-rated for private investors.)

Finally, my thanks to Pete for this very comprehensive article. Don’t forget to download his free eBook!