Investments :  A brief guide to Individual Savings Accounts (ISAs)

The Government introduced the Individual Savings Account as a plan to encourage more people to save. The plan came into effect on 6 April 1999 and replaced both PEPs and TESSAs for new savings.

In essence, the ISA is a tax-efficient wrapper that can be used to hold personal investments for UK residents over the age of 18. It can hold three different types of investments, namely stocks and shares or unit trusts (including fixed-interest gilts and bonds) like a PEP, cash deposits like a TESSA, and insurance which is a new development. There is no time limit on how long the plan must be held.

As a further complication, the investments can either be mixed together in one ISA, a Maxi ISA, or they can be held separately in three Mini ISAs. The investment limit is different for each type of plan (see below).

Existing PEPs and TESSAs can continue and the capital (not the interest) from maturing TESSAs will be able to continue tax-free within a TESSA-ONLY ISA (TOISA). This will be able to be held in addition to each year's normal ISA allowance, and, unlike TESSAs, need not be held for a minimum of 5 years.

What is the CAT Standard?

The 'CAT Standard' means fair Charges, easy Access and decent Terms, and was created by the Government to help savers and investors feel confident about identifying products that are clear, straightforward and offer reasonable charges. However, other ISAs, which do not fulfil all these CAT features, may be more suitable to some investors.

What are the ISA Investment Limits?

	Maxi ISA	Mini ISA
Total Annual Allowance	£7,000 currently	£7,000 currently
Stocks, Shares and Corporate Bonds	Up to £7,000	Up to £4,000
Cash	NIL	Up to £3,000

The two mini ISAs can be with different fund managers, but this does restrict the total amount that can be placed in stocks and shares each year. Only one maxi ISA can be bought each year. If you want to place more than £4,000 in shares, unit trusts or corporate bonds you must use a maxi ISA.

What are the benefits of ISAs?

• Tax efficient returns
• Wide range of investment choice
• Tax free income options
• Flexible transfer facilities

The ISA is not actually an investment in its own right. It is a tax-efficient wrapper that can be placed around a number of equity type investments, in order to exempt them from both income and Capital Gains Tax. The plan does not have to be held for a set period.

The key point in selecting an ISA is to decide on the right balance of risk profile/asset mix, and then see if a suitable ISA can be found to match this. One should be aware of buying an ISA simply because it is tax-efficient, if the underlying investment is not appropriate.

The right type of ISA for your circumstances can be a very sound investment, and a wide range of plans is on offer. High income versions are available, making full use of the tax-free income rules; although one should be wary of some ISAs paying very high income as these can put the capital at greater risk.

Tax Freedom

From April 1999 the tax credit on dividend income on shares reduced from 20% to 10%. This means that equity based funds held both in existing PEPs and new ISAs now only receive a 10% tax rebate each year rather than 20%. From 2004-2009 (ISAs have been guaranteed to exist for 10 years) dividends from equities will receive no tax rebate.

Deposit and fixed interest investments will continue to receive the full 20% tax rebate for the whole 10 years.

This makes a considerable difference and those wishing to get the greatest tax savings from ISAs and PEPs in the future may decide to use these plans for income rather than capital growth. Both plans avoid Capital Gains Tax - but few investors currently use their annual CGT allowance.

For income purposes a corporate bond ISA is appropriate. If you do not require income, ISAs and PEPs should continue to be used for sheltering equity growth from tax.

If you would like some advice on which ISA would best suit you, please contact us .

Notes

To invest you must be over 18 years old and a UK resident. Levels and bases of taxation, and relief from taxation, are subject to change as are the rules for ISAs.

Risk Warning

The value of investments and income from them may fluctuate and are not guaranteed. Past performance is no guarantee of future investment performance. Changes in the rate of exchange may cause the value of an investment to go up or down. The price of units can go down as well as up.