ISAs are tax efficient and offer the potential for growth
from some of the most exciting investment opportunities
in the world - or greater security if required.
The Government state that they are keen to increase the
number of people in the UK who save money to provide for
the future. As we are all living longer, the financial
strain on the welfare state needs to be assisted by people
providing for themselves. Savings is an area where the
Government offers tax breaks as incentives, but it is
amazing to learn that around 25% of the UK population
has no savings at all.
Many ISA offers will be tempting, but before you make
your decision as to which one is best for you, it may
be useful to read the following comments.
What is an ISA? ISAs are simple, flexible, tax-free savings
plans that are widely available and easy to set up. You
can set up an ISA without giving instructions in writing,
which allows them to be set up over the telephone or through
the Internet. The ISA manager will then send you confirmation
of what has been set up, which you can change if necessary.
You can also save in an ISA that will offer tax-efficient
savings through a wide range of investments. There are
hundreds of ISAs available but basically the come in three
different forms.
Investment - which includes unit trusts, investment trusts,
investment companies with variable capital (ICVCs), gilts,
equities and corporate bonds. Cash - which includes bank
and building society accounts, National Savings and cash
unit trusts. Life assurance - which includes savings products
which offer life cover as a benefit.
You can choose to invest in one element of the ISA, two
elements or all three depending on your requirements and
circumstances.
Who can Invest in an ISA? Anybody over the age of 18 is able to save
using an ISA as long as they are a UK tax resident. You
can take out an ISA even if you are not currently working.
You and your partner are both able to set up an ISA as
you get separate ISA allowances. You cannot take out an
ISA with somebody else as each ISA must be individually
taken out. However, you can subscribe to an ISA on behalf
of someone else, for example as a gift.
ISA type To 5th April each tax year
Investment ISA Up to £7,000
Cash ISA Up to £3,000
Life Assurance ISA Up to £1,000
Combined maximum £7,000
There is an overall maximum investment limit for ISAs
in each tax year and separate limits for each element
as shown above.
You can invest up to £3,000 cash in an ISA for the
current tax year.
If you have any cash sitting on deposit in the bank or
building society it may be advantageous to place some
of this money (having left yourself an adequate emergency
cash fund) into a cash ISA, because money on deposit with
a bank or building society is normally taxed at your highest
rate of income tax. Cash ISAs can include some National
Savings products, cash unit trusts and bank and building
society accounts and all interest will be tax-free.
You are able to invest £1,000 in Life Assurance
through an ISA each year. This can offer valuable protection
for your family in the event of death.
The Investment element of an ISA can be in funds such
as unit trusts, ICVCs or Investment Trusts. You may also
choose to invest directly into shares or corporate bonds.
If you take out an ISA with cash and life assurance elements,
your remaining allowance can be in an investment ISA.
You may prefer to invest your whole allowance in an investment
ISA.
There are benchmarks set by the Government to provide
assistance to investors when choosing an ISA. They cover
Cost, Access and Terms. There are three sets of "CAT"
standards, one for each element of the ISA and the common
themes are as follows.
Clear straightforward treatment of investors and advertising
in plain English No requirement to buy another product
An undertaking that the provider keeps to the CAT standards
after the ISA is set up
However, a CAT marking is just a template for a certain
type of ISA. It does not necessarily mean that a CAT marked
ISA will be the best performing or the most suitable product
for you. In reality ISAs offer a broad range of benefits
and so the most suitable product for you depends upon
your needs and circumstances.
There is a choice between many individual ISA managers.
Some managers only offer Cash ISAs or Life Assurance ISAs.
Others offer all the elements.
Different providers inevitably offer different rates of
return, different charges and different levels of service.
It is likely that there will be marketing incentives such
as bonus points or other loyalty prizes offered by some
providers.
Because of the large number of ISA providers and the different
types, it may be in your best interest to invest with
three separate ISA managers each tax year who specialise
in that particular area e.g. life assurance, cash management
and investment. This is the area where we can advise you
and help you make the right choice.
Mini and Maxi ISAs The Government has introduced two different
vehicles for the ISA, the 'Maxi' and the 'Mini'. Within
each of these two vehicles there are several investment
routes.
You can choose to invest through either of these two vehicles,
but you can't invest through both in the same tax year.
Should this be the case, your secondary investment will
be void and any tax advantages received will be repaid
to the Inland Revenue. Maxi and Mini ISAs differ in the
following ways:
Maxi ISAs enable you to save the full £7,000 entitlement
in the current tax year in stocks and shares, potentially
the highest performing savings vehicle. Alternatively,
in the same tax year, you can save less than the full
amount into stocks and shares and up to £3,000 in
cash and £1,000 life assurance. You only need to
select a single fund manager, and should remember that
you can only apply for one Maxi ISA in each tax year.
Mini ISAs allow you the flexibility to save with up to
three different ISA managers, enabling you to create an
investment portfolio ideally tailored to your needs. However,
with Mini ISAs, for the current tax year you can only
save £3,000 a year in stocks and shares - and no
more than £3,000 in cash and £1,000 in life
assurance.
PEPs If you already have money invested in a Personal
Equity Plan you can leave it where it is or switch to
another PEP provider. PEPs were abolished in April 1999
and it is no longer possible to invest any more money
in a new PEP.
It may be worth continuing with your PEP as they offer
similar benefits to ISAs. This means no income tax, no
capital gains tax, a 10% tax credit on all dividends from
UK shares within this investment until 5th April 2004
(but after this date the total credit will be nil), flexibility,
the ability to cash in at any time and a range of PEPs
to match your needs.
The questions you should ask are:
Is performance up to scratch?
Are my income and growth needs met?
Are the charges and return competitive?
What happens to my regular payments
in the future?
TESSAs After April 5th 1999 investors were also unable
to take out a new Tax Exempt Special Savings Account.
However, you can continue to pay into an existing TESSA
for the full five years. Many ISA managers offer TESSA-only
Cash ISAs for investors who want to move the money in
their maturing TESSA into an ISA.
The investment limits for TESSAs taken out before 6th
April 1999 remained at £9,000 over the five-year
term.
Tax Benefits Your ISA will benefit from tax-free growth,
free of all income tax and capital gains tax. UK shares
within the Investment element will benefit from a 10%
tax credit on any dividends paid until 5th April 2004.
After that date the tax credit will be nil.
Cashing in an ISA There is no minimum period for ISAs and you
can take money out at any time without losing tax relief.
This may not be the case if you choose to save in an ISA
that offers extra benefits but gives less flexibility.
Remember that the investment and the life assurance ISA
elements should be viewed as a medium to long term commitment
(5 years+) and the value of investments and any income
from them may fall as well as rise and investors may get
back less than they originally invested and past performance
is no guarantee of future performance.
Speak to us about your ISA or reviewing your existing
PEP investments We can advise you on the best options
available to you. We will ask you about how much you can
afford to invest, what your aims are, when you need the
money, the risks you are prepared to take and explain
anything else you want to know about.
