Is it worth moving to Isas from a good dividend portfolio?

My husband and I own shares in Tesco, Unilever, Shell, United Utilities and Hewlett-Packard, with a total value of about £60,000. We have not used our stocks and shares Isa allowance in the past, mainly because we are not sure how it works. We aim to retire in about five years and then want the dividends to provide income. At the moment, we reinvest them to buy more shares. Would it be of benefit to transfer some of these shares each year into a stocks and shares Isa, and if so, why; how would we do it; and what is the cheapest way to do so? Also, once shares are in an Isa, is it possible to sell them and reinvest in a different company while remaining in the Isa?

SF, by e-mail

Seize this opportunity to rethink your investments. Although you may be better off leaving well alone, on the basis of what you have described, if these five shares are all you own, you must spread your risk. All Isa income and capital gains are tax free, but you are each allowed to make tax-free capital gains of £10,100 a year, increasing in line with inflation.

Your £60,000 portfolio could record gains of more than £20,200 if the stock market continues to recover — indeed, you may already have that sort of gain after this year’s performance — and the Isa set-up process means you have to sell everything first. So work out your capital gains tax (CGT) liability at that point.

Your shares are, on the whole, good dividend payers, so within a few years you might be looking at £5,000 income a year or more, giving a tax bill of maybe £2,000. So whether it makes sense to create an Isa also depends on your tax position and the cost. If you keep your own portfolio you will need a self-select Isa, which usually costs too much to be worthwhile for basic-rate tax payers.

You have to open an account with an Isa manager approved by HM Revenue & Customs. A stockbroker would probably suit you best. See the Association of Private Client Investment Managers and Stockbrokers’ website at apcims.co.uk/findafirm. Their charges will mainly depend on whether you want advice and your willingness to deal online.

If you do not need advice, Selftrade is the cheapest at £35 a year for the Isa account plus £12.50 for each trade.

The manager will move your shares into an Isa, a process known as “bed and Isa” — a twist on “bed and breakfast” — as you have to sell the shares and buy them back the next day as part of the Isa. That’s when the CGT danger arises.

There is also a slight risk that the price of the shares might move against you while you are out of the market. After that, you can trade as actively as you wish without losing the Isa status, but bear in mind AIM shares are not eligible.

You should consider using the switch into an Isa to spread your risk more widely. You are invested in five high-quality companies, but if any one went wrong, your retirement plans could be ruined. Matt Pitcher, senior wealth adviser at Towry Law, said: “Consider diversifying into a fund rather than individual shares, and also a wider range of asset classes, including fixed interest and commercial property — where the income is still tax free in an Isa.”

My 15-year-old daughter wants to save birthday money and occasional handouts for use at university. What do you recommend? All the accounts she has looked at pay very low interest as she has no regular income. She wants to lock away the money, but earn a good return.

AN, by e-mail

Even young savers are regarded as fair game by banks and building societies trying to recover from the credit crunch, so strings and small print abound.

According to Moneysupermarket, the top payer is Halifax at 6% gross, but you must be under 16 and pay in between £10 and £100 a month by standing order from another bank account. Yorkshire and Clydesdale banks pay 5.1% to under-16s, but lock in savers for five years and allow only one lump-sum deposit to be made.

Bath building society’s Future Builder account pays 5% on deposits of between £1 and £500. It is an easy-access account, but at 18 the money transfers automatically to Bath’s Lifestyle account, which pays next to nothing. Interest is paid annually, so open it just before your daughter’s 16th birthday.

Hannah Edwards at Killik, the broker, likes Harpenden building society’s 18 Club savings account that pays 2.45% on £1 to £50,000. No withdrawals are allowed until the age of 18. She recommends that when your daughter reaches 16, she should switch to Halifax Regular Saver, which pays a fixed 5% on a minimum £25 monthly deposit.

Jason Butler at Bloomsbury Financial Planning said: “If your daughter has at least £250, Earl Shilton building society’s Foundation account pays 2.25%, accessible by telephone, post or at a branch, and available until the age of 21. She can add as little as £1 a time, but can make only three withdrawals a year.”

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