Savings / ISAs

What is an ISA?
The Government has introduced Individual Savings Accounts (ISAs) as a way of saving without paying income tax or capital gains tax on any money made. These are a simple and flexible way to save and invest for anyone who is 18 or over (16 or over in the case of cash ISAs) and resident in the UK for tax purposes.  This is because the Government wants to encourage everyone to save money.

This is how they work:
An ISA is a tax-free wrapper for your savings. The savings components in an ISA are as follows:

• Cash - this can include bank and building society accounts, cash unit trusts and some National Savings products.
• Stocks & shares - these can include equities, investment trusts, Gilts, bonds and unit trusts.
• Insurance - this can contain life cover or savings products, which include life cover as a benefit.

You can put a combination of one, two or all three of these components in an ISA.
The Government has set a limit for the value of contributions to ISAs.  The maximum investment limit is up to £7,000 and is set until 5th April 2006.  You can withdraw money at any time but once you have invested your full allowance, you will not be able to add any further money to your ISA until the start of the following tax year.

ISA’s can only be owned by an individual.  There are no joint ISA’s, no ISA’s held on behalf of others although there is nothing to stop you setting up an ISA in your own name and handing the proceeds to someone else, e.g. a child, in the future.

Three kinds of ISA

• Maxi
• Mini
• TESSA only
  
  

Maxi ISA.
A Maxi ISA is when you choose one manager for all your tax-free investments.  You can invest up to £7,000 this tax year and the maximum subscription limit will stay at this level until 5th April 2006.  You can invest in stocks and shares, cash and insurance in a Maxi ISA, depending on which components are offered by the ISA manager.

Always use a Maxi ISA if you want to invest more than £3000 in stocks and shares that year.
Up to £3000 can be invested in cash, and £1000 in life assurance.
The monies invested in one component must stay with that component until cashed in, even if you transfer to another plan manager.

You can contribute to only one Maxi ISA each year.  Be it new or existing.
The Maxi ISA funds have to stay with one plan manager for all their components.

You cannot contribute to a Maxi ISA if you have already contributed to a Mini ISA in the same year.

Mini ISA.
Investing in a Mini ISA means you can choose up to three different ISA managers, one for each type of component.

Each Mini ISA can consist of any one of the following.  There are three types of mini ISA’s.  (The maximum subscription limits will stay at this level until 5th April 2006.)

• Up to £3000 in stocks and shares.
• Up to £3,000 in cash.
• Up to £1,000 in insurance.

You can contribute to one of each, each year, but not if you have already contributed to a Maxi ISA.  You can place each Mini ISA with a different plan manager.

TESSA-Only ISA.
If you have a TESSA, up to £9,000 of the maturing capital can be transferred into a TESSA-Only ISA.  When your TESSA matures you can use the capital element (not any interest) to invest in special TESSA only ISA, a Cash Mini ISA or the cash component of a Maxi ISA.
Any investment is in addition to your normal annual ISA limit.

Charges and CAT standards:
Plan managers can impose any terms or charges that they like (as they can with any investment), but those that meet certain criteria laid down by the Government for low Charges, easy Access and fair Terms can claim to meet the CAT Standards.  While this is a useful standard it has the effect of limiting the options open to the Plan Manager. It is important that you are sure that you want your ISA to operate within these restrictions. They could result in your fund performance being lower than otherwise.

Transferring funds between ISA’s:
Broadly speaking you can transfer funds between managers whenever you want (see the Maxi and Mini details.)  Also plan managers are free to impose restrictions and terms on transfers.  When transferring money invested in previous years you can move it in whole or in part.  When transferring money invested this year you must transfer all of the money invested to the new ISA.

Tax aspects:
There is no income tax on any income, or capital gains tax on any gains.  Life policy proceeds are tax-free.  There is no need to tell the Inland Revenue anything about your ISAs. You don't even have to tell them that they exist.  ISAs end on death, and their value at that time is included within your estate for Inheritance Tax purposes.

Flexibility:
In any case you can contribute when you like, and take your money out when ever you like.