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Last Updated: Wednesday, 17 December, 2003, 06:36 GMT
How will ISA changes affect you?
Money Talk
By Anna Bowes
Independent financial adviser, Chase de Vere

Anna Bowes
The Treasury has announced that the amount that people will be allowed to save tax-free is to fall. An expert explains the changes and what strategy people should adopt.

When Individual Savings Accounts (ISAs) were introduced by Gordon Brown in 1999 the amount that could be paid in was set at 7,000.

At the end of the first year the Treasury said that the tax-free savings allowance would fall to 5,000.

However, the Chancellor later decided to extend the period that the 7,000 limit would continue until April 2006.

In the recently published pre-budget report the Treasury reiterated that the limit would revert to 5,000 in 2006.

The reduction of the amount that can be invested into a mini cash ISA will be a blow for many savers

But under the government proposals - to be opened up to consultation with the finance industry - how the money can be invested in an ISA is to be simplified.

Current limits

Under current rules, a maxi ISA allows investors to put up to 7,000 into shares, but it can also be broken down to allow up to 3,000 to go into cash savings and 1,000 into insurance.

A mini ISA enables investors to split up their money into three separate cash, share and insurance ISAs.

The limits are 3,000 in cash, 3,000 in shares and 1,000 in insurance.

Under the new rules there will only be two elements to a mini ISA - 1,000 maximum in cash and 4,000 into stocks and shares.

The insurance mini ISA - which hasn't proved popular - is being scrapped.

As for Maxi ISAs, people can use their full tax-free allowance of 5,000 to invest in either stocks or shares, medium-term stakeholder products, life insurance or collective investments.

ISA LIMITS FROM 2006
Maxi ISA: 5,000 to be invested in either stocks or shares, medium-term stakeholder products, life insurance or collective investments. Alternatively, up to 1,000 can be held in cash with the remainder in stocks and shares with one provider
Mini ISA: 4,000 in stocks or shares or 1,000 in cash, can be held with two different providers

The reduction of the amount that can be invested into a mini cash ISA will be a blow for many savers.

Many people who have paid into a mini cash ISAs may not have dreamed of investing in Personal Equity Plan (PEP) - the predecessor of ISAs.

What is more, the innovation of mini cash ISAs came at just the right time, as savings accounts have outperformed shares in recent years.

Strategy

SELECT MINI CASH ISA RATES
Intelligent Finance 4.35%
Portman Building Society 4.35%
Northern Rock 4.20%
Kent Reliance Building Society 4.16%
Variable rate accounts only
Source: Chase de Vere
(correct at 16/12/03)

It is really important to use the higher allowance while you still can.

It is imperative that any savings that are languishing in taxpaying accounts are transferred into a mini cash ISA - if you have not yet used your ISA allowance for this tax year.

As for the stocks and shares ISA allowance, there is a major health warning.

You should never use the stocks and shares ISA allowance just for the sake of it.

Stock market investment can be risky and it has to be right for you.

But there are ways of keeping a lid on risk.

Collective investments such as unit trusts or investment trusts pool investor cash in order to buy a basket of different company shares.

The views expressed are solely those of Ms Bowes and are for general information only. They do not constitute financial advice as defined by the Financial Services and Markets Act and are not intended to be relied on for the purposes of making an investment decision. Always obtain independent advice from a qualified, registered financial adviser before making any investment decisions.


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