ISA Guide

ISA Guide

Individual Savings Account - What are they?

The ISA is the tax-free replacement for PEPs and TESSAs, introduced by the present government.
It is a tax-free investment for individuals via direct shares or Unit Trusts/OEICs.
A facility for a cash element and or a life assurance element also exists.
The option of being able to select from various elements makes this an attractive investment for all individuals.

How long will ISA's last?

The ISA is guaranteed to run for at least 10 years from their introduction (April 1999).
After 7 years a review will take place. Any changes from the review may be made to ISAs after the initial 10 year period has expired.

What are the Investment limits?

£7000 per annum of which: £1000 per annum can be cash or National Savings and £1000 per annum can be a life assurance element.

How does an ISA work?

An ISA has three different components:
1. Cash - Saving your money in a deposit account.
2. Stocks and Shares - Investments that are linked to the stock market - an option similar to PEPs.
3. Life and Assurance - Saving your money in a life assurance product.
With an ISA you can choose one, two or all three of these components.

How can you spread the ISA components?

The ISA has three components or elements and an investor can either have three separate managers looking after each component or one manager looking after all three components.
An investor may also choose an ISA that invests only in a certain type of unit trust. However, an investor may wish to have the flexibility to invest in an ISA with the three different components as long as they do not invest more than the maximum for each component.

What are Maxi and Mini ISAs?

There are two types of ISAs in which the three components can be held:
1. Maxi ISA - allows you to invest in one or more of the components with one provider.
2. Mini ISA - allows you to open one Mini for each of the components. Each component can be held with a different provider.
In any one tax year you may contribute to either one Maxi or up to three different Mini ISAs, but you are not allowed to contribute to both a Maxi and a Mini ISA in the same tax year.

How much can I Invest?

Mini ISA

You can invest your money in each of the following components, subject to an overall limit of £7,000

Cash:	up to £3,000
Stocks and shares:	up to £3,000
Life Assurance:	up to £1,000

Maxi ISA

You can mix and match how you spread your money as follows, subject to an overall limit of £7,000

Cash:	up to £3,000
Stocks and shares:	up to £7,000
Life Assurance:	up to £1,000

Advantages of ISA's

The plan is exempt from Capital Gains Tax and Income Tax.
A 10% tax credit is also paid for the first five years of the plan on dividends received from UK equities.
This would also apply to UK equities held within unit trusts as well as the life assurance component.
ISA's have no minimum term and an investor will only be bound by the rules of the plan that they select.

Disadvantages of ISA's

The ISA does not have such attractive investment limits as a PEP and TESSA.
ISA's maybe considered a complex product, therefore Independent financial advice maybe worth considering ensuring that an investor purchases the most appropriate ISA..

CAT Standards

With the launch of ISAs, the Government has introduced a set of voluntary benchmark standards as a guide to investing in ISAs. These are known as the CAT standards
ISA's can be divided into 'CAT' and non-'CAT' standard ISAs.
CAT stands for:
- fair Charges
- easy Access
- decent Terms
In order for an ISA to be described as 'meeting the CAT standard', each component within an ISA will have to meet the standards.
However, this does not necessarily mean that it will be the most suitable product for you. The CAT standards also do not guarantee investment performance.

What happens to TESSAs?

If you have a TESSA, within 6 months of its maturity you have the option to either:
1. re-invest your TESSA contributions into the cash component of either a Mini ISA or Maxi ISA, without it counting towards your ISA limits; or
2. re-invest your contributions in a TESSA Only ISA.

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