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Index Trackers and ISAs

Navigate the differences between index tracker ISAs (individual savings accounts) and managed funds and find out which investment method is best for your needs.

Index tracker charges and ISAs

Index trackers generally charge you the same whether you buy them inside or outside an Individual Savings Account (ISA). So there's no downside to being in an ISA and you might as well be safe rather than sorry.

Beware of capital gains tax

What's at stake is the capital gains tax on any gains that your tracker makes over the years. You get an annual exemption from capital gains tax, currently £8,200 per year, but if you're investing for the long term, then you'll hope to make gains eventually that exceed this. Of course, the more you put into the index tracker each year, the more likely it is that capital gains tax will eventually become an issue. But, if it costs nothing extra to use an ISA wrapper then, as we've said, you might as well. Higher rate taxpayers will also benefit from not having to pay additional tax on dividends that they receive in an ISA.

When not to put your index tracker in an ISA: reason one

There are a couple of situations that might depart from this. First of all, if you're saving for retirement, then it might be better to wrap your index tracker up in a stakeholder pension. These have some problems of their own, but they're designed to give you a retirement income safely and, if that's your aim, then there's a lot to be said for them. There's more about the pros and cons in the Pension Centre.

When not to put your index tracker in an ISA: reason two

Another reason for shunning an ISA for your index tracker is if you do actually go for one that costs more to have wrapped in an ISA than it does to buy separately. This might be the case for index trackers that are structured as investment trusts or exchange traded funds (eg 'iShares'). However, there are brokers that provide specialised ISAs to house these products and the small extra cost is most likely worth it to avoid the risk of capital gains tax down the line.

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