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Last Updated: Thursday, 27 October 2005, 22:34 GMT 23:34 UK
Ask the expert: Individual saving accounts
Jonathan Fry
This week's expert is Jonathan Fry
The BBC News Ask the Expert column gives readers a chance to have their financial questions answered.

This week BBC News website reader Diane Toman would like clarification over whether she can open a mini cash Isa and a maxi stocks and shares Isa in the same year.

In addition, Ms Toman would like to know what the key differences are between these two investment types?

The week's expert is Jonathan Fry, an independent financial adviser.

Jonathan Fry writes:

Isas are a tax-free scheme designed by the government to encourage people to save money.

Any investment growth or interest earned on money in an Isa is free from tax but there are strict rules governing contributions.

Under Isa rules, a person can invest up to a maximum of 7,000 in any tax year (which runs from April to April), completely free of tax.

There are two main components on offer - cash and shares - and exactly how that 7,000 is broken down is up to the individual concerned.

A mini Isa enables investors to split up their money. You can have a mini for both parts of your Isa (either with the same provider or two different ones). The limits are 3,000 in cash and 4,000 in shares.

Alternatively, you can invest 7,000 a year tax free in a stock and shares maxi Isa.

You are not allowed to invest in both a mini cash Isa and a maxi stocks and shares Isa in the same tax year, so you would need to wait until next year before you can put money into a maxi if you have already put money into a mini.

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Different animals

A cash Isa and a stocks and shares Isa are fundamentally quite different animals.

A mini cash Isa is probably the best option for money you need to keep available, and if you cannot afford to risk the value falling.

It is a good place for your cash reserves and rainy day money.

A stocks and share mini or maxi Isa is ideally suited to longer term savings.

The value of the money you invest is going to go up and down, so you could find yourself with less than you originally put in.

Stock market investors had a rough ride, indeed a very rough ride, between March 2000 and March 2003.

But, history suggests that stock market linked investments protect the real value of money against the effect of inflation over the longer term.

Lock away cash

Many of the mini cash Isa accounts on offer give you instant access to your cash without penalty.

But if you are prepared to tie the money up in a notice savings account then you can get a better rate. Notice periods can run from 30 days to five years.

If your view is basically short term then it may be best for you to go with a mini cash Isa

However, the extra interest on offer for agreeing to a notice period is not that great and, on balance, you may be best going for an instant access cash Isa.

The best buy cash Isas pay about the 5% mark. This is 2% above the rate of inflation.

But would you be better off with a stocks and shares Isa?.

If you are prepared to commit your money for say five, or ideally ten years or more, then I would expect that it should provide more rewarding than a mini cash ISA.

Objectives

The key is to decide upon your investment objectives. Is it a short term cash reserve, or a medium to long term investment. If your view is basically short term then it may be best for you to go with a mini cash Isa.

If you are willing to commit some of your money for a longer period of time, you are prepared to see its value go up and down, then consider a mini or maxi stocks and shares Isa.

You do need to remember that whilst stock market linked investments tend to be worthwhile over the longer term, past performance is no guarantee of future results.

The stock market has improved considerably since the low it reached in March 2003, but that does not mean it will continue to go up.

Ideally you should try to arrive at having a balance of some money you can turn to at short notice and some longer term savings.


The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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