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Last Updated: Thursday, 20 March 2008, 00:01 GMT
Arrival of the new ISA age
Money Talk
By Mark Dampier
Hargreaves Lansdown

Mark Dampier
Mark Dampier
Individual Savings Accounts (ISAs) were launched in 1999, but the government only guaranteed to keep them for 10 years.

More recently, however, the chancellor announced that they were to become a permanent feature of the savings landscape.

Good thing too. The tax savings they offer have made them into a massively popular savings vehicle.

More than 17 million people now have an ISA - around one in three UK adults - and between us we have invested more than 250bn

Why so popular?

Within an ISA you pay no capital gains tax and no further tax on the income.

The cautious can simply use a cash ISA as a way to get tax-free interest

You don't even need to declare ISAs on your tax return, and less tax means higher returns for you.

Any UK resident over 18 (16 for mini-cash ISAs) can invest in an ISA.

There is no upper age limit and you can withdraw your tax-free savings whenever you need them - many mini-cash ISAs even offer instant access.

Best of all, investors generally receive the benefits free of charge because in most cases it is no more expensive to place your investments inside a tax-free ISA.

The cautious can simply use a cash ISA as a way to get tax-free interest.

The more adventurous can use a stocks & shares ISA to invest in the stock market in search of superior returns.

Since 1999, for instance, 3,000 saved each year in a typical cash ISA would be worth 33,734.

The same investment in an average stocks & shares ISA would be worth 37,254.

Regime change

Under the current rules you can invest 7,000 in ISAs each tax year (a tax year runs from 6 April one year to 5 April the next).

Currently you can invest:

  • 3,000 each tax year in a cash mini-ISA
  • and up to 4,000 each tax year in a stocks and shares mini-ISA
  • or 7,000 each tax year in a maxi-ISA, of which up to 3,000 may be in cash.

On 6 April new ISA rules will come into effect.

The annual ISA allowance will rise to 7,200 and the distinction between maxi- & mini- ISAs will be removed.

There will simply be two types of ISA - a cash ISA and a stocks & shares ISA.

You will be able to invest up to 3,600 in a cash ISA during each tax year and the balance (up to a total of 7,200) can be invested in a stocks & shares ISA.

In addition, Personal Equity Plans (PEPs) will become stocks & shares ISAs, and you will be able to transfer cash ISAs into a stocks & shares ISA.

Things to watch

With cash ISAs the highest interest rate is not always the best.

Past performance tells you only one thing: what has done well in the past

Some banks attract savers into top of the table interest rates, only to drop their rates later or fail to increase them when other providers increase theirs.

Base rate tracker ISAs will follow the Bank of England rate and often offer a better deal.

With stocks and shares ISAs, never forget that past performance tells you only one thing: what has done well in the past.

You need to know what will do well in the future and there is plenty of free research available from independent brokers and websites.

Charges

Opening a cash ISA should be free.

But investment is one of the few areas where it can actually cost less to use a middle-man.

If you open a stocks and shares ISA with an investment company directly you may be charged as much as 5% of your initial lump sum for the privilege.

However some discount brokers offer to give you back the commission they would earn from the investment company with which you are investing.

That can cut the initial charge to as little as 0.25%, or in many cases even 0%.

Regular contributions

You don't have to invest your money all in one go.

If you want to make use of this year's ISA allowance, you must act by 5 April

Most ISAs offer regular savings plans - which is a superb way to capitalize on market volatility.

Falling markets allow you to buy units in your chosen funds at lower prices, so if the market eventually regains its lost ground they will count for much more.

If the current market volatility is making you nervous, don't forget some ISA managers also allow you to hold cash within your ISA, so you can secure this year's allowance and choose where to invest later.

You might even get a high fixed interest rate for any new money you invest.

So what about your existing ISAs?

In effect the new rules will make very little difference to any ISAs you already hold.

One thing to consider, though, is a different way of holding your ISAs - fund supermarkets.

Fund supermarkets allow you to hold a variety of investments in a single account - so the days of having different ISA accounts with different providers who all send you reams of paperwork are over.

You can simply transfer your ISAs into a fund supermarket ISA as they are - there is no need to change your holdings to benefit.

The most important thing is to use your ISA allowance each year if you can.

If you want to make use of this year's ISA allowance, you must act by 5 April.

Once gone it is lost forever and you will be letting the tax man get his paws on your hard-earned 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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