Individual Savings Accounts

ISAs

What is an ISA?
ISAs, short for individual savings accounts, were introduced on April 6, 1999 as a replacement for PEPs (personal equity plans) and TESSAs (tax exempt special savings accounts).

Contrary to widespread belief, they are NOT an investment or savings product in themselves. They are simply a tax-efficient ‘wrapper’ that you place around an investment or savings vehicle, such as a unit or investment trust, or a building society high interest account.

You can invest up to £7,200 a year (in 2008/9) in a tax-free environment, and you can keep doing this year after year for as long as ISAs remain available, i.e. there is no overall limit.

1. You can put a broad range of equity and bond investments in ISAs, as well as units trusts, OEICs, investment trusts and exchange traded funds.
2. You can also allocate some of your annual allowance to cash deposits.
3. The fund builds up free of capital gains and income tax, and in most cases you can withdraw your money at any time tax free.

The government has confirmed its long-term commitment to ISAs, as well as simplifying the rules:

1. PEPs are now stocks and shares ISAs
2. the distinction between maxi and mini ISAs has been abolished - instead, clients can have a cash ISA and a stocks and shares ISA
3. the annual allowance for investments is £7,200 in total, with no more than £3,600 in a cash ISA.
4. clients can transfer existing cash ISAs into a stocks and shares ISA
   

Where should I invest my ISA?
This all depends on your attitude to risk and individual circumstances and needs. For example, if you are not prepared to take any risks with your money and need access to it at any time, investing your money in to a a high interest savings account or National Savings product within a cash ISA is possibly the best route.

If, on the other hand, you are prepared to invest for the long term, and are prepared to leave your money untouched for at least five years, it might be worth investing in an investment fund such as a unit or investment trust, or life insurance policy, within a stocks and shares ISA. Exactly which fund you choose will depend, of course, on your attitude to risk and you MUST understand that the value of your investments can go down as well as up.

What are the tax advantages of ISAs?
Whether you’re investing in a mini or maxi ISA, the tax advantages are as follows:

1. You will not be taxed on any capital gains arising from your ISA investments
2. There is no tax on the income you receive from any ISA investments, whether dividends, interest or bonuses (although the 10% UK dividend tax credit is no longer reclaimable)
3. You do not have to declare any ISA investments to the Inland Revenue

Am I eligible for an ISA?
If you’re aged 16 or 17, you can invest in a cash ISA. However, to invest in a stocks and shares ISA, you have to be aged 18 or above and resident, or ordinarily resident, in the UK for tax purposes.

Can I take my money out of an ISA?
Yes, it’s possible to take money out of an ISA at any time, although this isn’t always advisable. After all, some cash ISAs may require you to give a period of notice before you withdraw funds, without which they may charge a penalty or cancel a bonus payment.

And if you opted for a stocks and shares ISA, you may not get back all the money you invested should you exit in the early years of an investment. Nevertheless, if you do take money out of your ISA, you will not lose any tax benefits that have built up to that point.

What happens if I invest in too many ISAs?
If, in any individual tax year, you invest in more than one maxi ISA, more than one mini ISA of the same type, or a maxi and a mini ISA, any payment that you made into the second ISA is deemed to be invalid for tax relief purposes.

Can I transfer my ISA?
It is possible to transfer ISAs from one provider to another and in most cases you simply ask the new provider to arrange the transfer. However, depending on where your ISA is held, you may have to pay a charge or sell your investments first.

Also, you cannot take money out from a cash ISA with one manager and then invest it in a stocks and shares ISA with another manager.