Managed Investment ISAs and DIY Investment ISAs are two forms of tax-free investing.They offer the same amount of tax protection, but different ways of managing your investments. This is what you need to know about the relevant strengths of DIY and Managed ISAs.
The popularity of Investment ISAs, also known as Stocks and Shares ISAs, stems from their ability to shield any investment gains from taxation. Another plus point is that they are versatile, so you can choose between a Managed or DIY Investment ISA, depending on your personal approach to investing.
What is a DIY Stocks and Shares ISA?
A DIY Stocks and Shares ISA is a type of investment account. It holds assets such as stocks, ETFs, and bonds and since it is part of the HMRC ISA scheme, any returns are free from income tax and capital gains tax. You have complete control over which assets you buy and sell, and when you do so.
The Do-it-yourself approach to Stocks and Shares ISAs is the most personalised. That also means you will be entirely responsible for all aspects of portfolio management, including trading, risk management, and portfolio rebalancing.
What is a Managed Investment ISA?
Like a DIY ISA, a Managed Investment ISA is an account which is exempt from CGT and income tax. The Managed ISA approach involves delegating investment decisions to third parties and can help those who either don’t feel comfortable making those decisions, or simply prefer a hands-off approach.
Buying “off the shelf” ISAs in this way allows you to invest in a variety of portfolios which have different investment themes and objectives. Different strategies might include ESG investing, high-yield bonds, short-term returns, or thematic investing. Day-to-day decisions on matters such as risk management and which assets to buy or sell will be made by the ISA manager.
Tip: The first investment decision you should make isn’t buying stocks, but establishing what kind of investor you are.
Comparing Managed and DIY Stocks and Shares ISAs
The Managed and DIY ISA schemes have their own relative pros and cons. How these influence your decision on which option to take will depend on your personal approach to investing, investment objectives, and appetite for risk.
If you favour a more “hands-on” approach, then, there are cost savings to be made, DIY ISAs generally have lower fees since you aren’t engaging the services of a third party. Then again, Managed ISAs offer a combination of smart technology and human expertise which could justify the fees in the long run..
| Factors to Consider | DIY Investment ISA | Managed Investment ISA |
|---|---|---|
| Are you time-poor? | 👎 | 👍 |
| Do you prioritise minimising management fees? | 👍 | 👎 |
| Would you like to learn more about investing? | 👍 | 👎 |
| Do you lack investment expertise? | 👎 | 👍 |
| Would you like to have greater control over investment decisions? | 👍 | 👎 |
Tip: Managed ISAs still require some form of ongoing oversight from you, such as monitoring performance or changing your strategy.
How To Choose the Right Investment ISA for You?
When choosing your Investment ISA, consider what you want to achieve, and how much risk you are willing to accept as part of getting there. It is important to be realistic because the greater the targeted return, the higher the risk of losing some or all of your money.
It is also important to establish your risk tolerance. Booms and busts are an inevitable feature of the financial markets and you need your portfolio to have risk levels which allow you to avoid making panic decisions should the markets turn against you. Having a lower-risk portfolio will make it easier to ride out any short-term volatility.
It’s also worth remembering that each person’s investment time horizon will be different. An Investment ISA portfolio designed to mature in 20 years’ time will be made up of different types of assets than one which is intended to have a life-span of 5 years.
Tip: Choose your strategy carefully. The tax breaks associated with ISAs are only relevant if you make a positive return.
How To Sign Up for an Investment ISA?
DIY and Management Investment ISAs operate on platforms created by ISA providers. Whichever option you choose, the process starts with opening an Investment ISA account by completing an online application and then funding your account.
If you follow the DIY approach, you will use some or all of that capital to buy stocks, ETFs, bonds, or other ISA-eligible assets to gain exposure to the financial markets. If you take the Managed ISA approach, you will use your capital to invest in an already established portfolio which is operated by your ISA provider.
eToro’s integration with Moneyfarm allows eToro clients to use their existing account as a base for setting up a Moneyfarm Investment ISA.
From this page on the eToro platform, click the “Get started” button and you will be taken to the Moneyfarm registration page. This is where you will be given the option to set up a DIY or Managed ISA. It’s also possible to set up both, and explore which approach you prefer. If over time you find you have a strong preference for one over the other, you can at any time transfer capital from DIY to Managed, or vice versa.
Tip: Managed Investment ISAs offer a way for inexperienced investors to benefit from the support of others.
Final thoughts
The most important similarity between Managed and DIY ISAs is that they all benefit from attractive tax treatment. The differences between them are also important, not least because that means that all kinds of different investors can find an Investment ISA which suits them.
Giving some thought to which approach suits you is valuable for other reasons. Carrying out a realistic self-appraisal of your aims and risk appetite is one of investing’s five golden rules. Not being quite sure which approach to follow shouldn’t act as too much of a barrier to getting started because of the user-friendly functionality of ISAs. If you want to change your approach, maybe because your circumstances change, you can switch from one format to another, and still retain the favourable tax breaks.
Visit the eToro Academy to learn how to get the most out of Investment ISAs.
FAQs
- How much time is needed to manage a DIY Investment ISA?
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The time required to manage a DIY ISA will depend on the type of strategy you adopt and market conditions. A portfolio holding low-volatility assets such as bonds and blue-chip stocks could be expected to be easier to manage even during periods when markets are distressed. Buy-and-hold portfolios like this may only require adjusting on a quarterly or even annual basis and those changes could be expected to be minor in nature.
Managing a portfolio aiming to outperform the market by targeting small-cap growth stocks would take more time. Not only in terms of regular monitoring of performance and news releases, but there would be a need to devote more time to the research and analysis associated with “stock picking.”
- Where can I find details of the costs associated with different types of ISAs?
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All ISA providers are required to outline the costs involved with their products. These can include management fees, trading commissions, and any processing charges which apply to cash movements. Optimising returns is about more than picking an effective trading strategy, so it is important to familiarise yourself with any T&Cs which apply to different types of ISAs.
- What is the current UK Capital Gains Tax threshold?
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Each UK resident can bank up to £3,000 in capital gains in any tax year before they start to pay CGT on any profits in excess of that threshold. This figure does change, for example, in the 2020/21 tax year, the threshold was £13,200. ISAs offer a way of avoiding having to predict where the CGT threshold might be in the future or completing tax returns to process any CGT liability you might accrue. Please note that eToro does not provide tax advice and the information provided should not be interpreted as such. Customers should seek independent tax advice.
- What are the average returns on an Investment ISA in the UK?
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ISA manager Moneyfarm states that between 2014 and 2024, the average annual rate of return for Stocks and Shares ISAs on their platform was 9.64%. The returns quoted by other platforms will differ due to the aggregate performance number being made up of many individual ISAs.
Past performance is no guarantee of future returns, and short-term returns are more variable, for example, Moneyfarm reports that in the year 2021/22, the average return was 6.92%.
- Can I hold both a DIY and a Managed ISA?
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Yes. This can happen if you decide to use your £20,000 annual ISA allowance to build a DIY ISA in one tax year and a Managed ISA in another tax year. You can even set up both types of ISAs in the same tax year, as long as you don’t exceed the £20,000 total allowance.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.