We look at how to use an investment ISA to make investing in an OEIC tax free and get the most from your investments.
If you are considering investing in an OEIC, using an investment ISA to make it tax efficient will ensure you get to keep all the profits your money makes.
You need to think of the OEIC and the ISA as two different products: the OEIC is the investment, the ISA is simply a wrapping that makes any profits tax free.
However, with a wide range of OEICs on the market, as well as a variety of investment ISAs available, finding the best combination of products can be tricky.
We show you how to compare OEIC ISAs to get the best tax-free wrapper for your investments.
Why investment ISAs and OEICs?
Put simply, if you invest your money directly into an OEIC then you will have to pay Capital Gains- and/or Income Tax on your profits.
If you put your money into an Investment ISA that is linked to an OEIC you won’t pay any tax, so your money is working harder on your behalf.
In the 2013/14 tax year every adult can save up to their full £11,520 tax free allowance in an investment ISA, less up to £5,760 already deposited into a cash ISA. The money you invest in an OEIC ISA account is therefore tax free for up to £11,520 worth of investments.
If you have any questions on investment ISAs then try reading our guide, Investment ISAs: A Beginner’s Guide.
How does it work?
OEIC ISAs are linked directly to a specific OEIC (Open Ended Investment Company): the money you save in the ISA is used to buy shares in that OEIC. From that point on it works exactly the same as investing with an OEIC directly.
The shares you’ve bought represent your portion of the fund’s total value. The fund is the pooled money of all its investors, which is then used to buy stocks, shares and bonds on the stock market.
By pooling your money together with other investors’, the fund can invest in a wide range of stocks, thus minimising the risk of investing. The best ISA funds can earn big profits for their investors through the dividend payments and capital growth of their stocks and shares.
However, it is still possible that OEIC funds may fall in value meaning the underlying shares held by their investors fall as well; and in the worst case scenario you could lose your entire investment.
How to choose the best OEIC ISA account
The first thing to do is decide on the type of OEIC you want to invest in, then search for ISAs linked to OEICs that match that criteria.
When looking for the type of OEIC you want to invest in you’ll need to consider:
Its market – if you have a particular preference for the type of shares it buys, e.g. UK companies only, or in the telecoms industry only
- Its risk – OEICS vary the risk they take with your investment, e.g. OEICs that invest in start-up companies are exposed to more risk, although high-risk investments also offer bigger potential for profits
- Its ethics – if it invests in unethical industries such as arms dealing or tobacco, or alternatively if it invests only in ‘green’ businesses
- How you want to invest – whether you want to invest a lump sum, or a set monthly amount
You can then compare ISA OEIC performance as well as ISA OEIC prices and charges to find a fund that matches your needs.
The price affects how many shares your money would buy, so the amount you earn in dividends and your profit from selling your shares. The best performing ISA OEIC funds will generally charge a higher price per share, but you can use our OEIC ISA comparison table to find the best deal.
Fees are typically charged on your initial deposit (usually around 2-5%), as well as a smaller annual management charge (AMC), so shop around and compare OEIC ISA charges to ensure you get the best deal.
If you compare the performance, share price and charges for OEIC ISAs that match the way you want to invest, you can make sure you choose the best OEIC ISA account for your needs.