A
Mini or a Maxi?
The Maxi ISA is likely to be more suitable
for investors who wish to place most, or all, of their ISA allowance
in stockmarket-based investments such as OEIC funds, Unit Trusts and
Investment Trusts. In this way, your ISA will be very similar to what
investors became used to with PEPs: a single plan manager with a generous
overall investment limit.
A Maxi ISA must contain the Investment component and can, depending
on the provider, also include Cash and Insurance options, offering
greater flexibility.
Maxi
ISA
- Single provider each tax year
- Cash and Insurance optional
- Up to £7,000 can be placed in investments during the 2004/2005
tax year.
A Mini ISA lets you spread your savings around individual options
available with different providers. Mini ISAs will restrict your Investment
ISA to a maximum of just £3,000 a year and could result in investors
losing part of their valuable overall ISA allowance if not all three
Mini ISA types are opened.
Mini
ISA
- One or more providers each tax year
- Up to £3,000 in an Investment Mini ISA
- Up to £3,000 in a Cash Mini ISA during the tax year 2003/2004
- Up to £1,000 in an Insurance ISA
A
word of warning
If you open a separate Mini Cash ISA, this
means that your Investment ISA contribution that year must also
be in the form of a Mini ISA – with a maximum contribution
limit of £3,000. If you place just £1 in a Cash Mini
ISA, you will reduce the amount you can put into investments tax
efficient from £7,000 to £3,000.
Many banks, building societies and even supermarkets may be offering
tempting rates and special incentives to get investors to open a
Cash ISA. Before accepting such offers, you should be aware of the
consequences this will have on your flexibility to contribute to
an Investment ISA.
If you are planning to open a separate Cash ISA, you should first
ascertain whether this is a Mini ISA. If it is part of a Maxi ISA,
you will also be tied to that same ISA provider for your other ISA
savings in that plan year.
|
|
What
are ISAs?
ISAs are simply a form of tax efficient shelter or
‘wrapper’ in which you can place your investments to provide tax
efficient savings. Introduced on 6 April 1999, the ISA has been developed
by the present Government which believes that by combining the most attractive
features of PEPs and TESSAs, ISAs will enjoy a wide appeal amongst an even
greater number of investors.
Why
has the Government replaced PEPs and TESSAs?
The objective for ISAs is to take the benefits in investment tax incentives
to a wider section of the population, including those who have not previously
made investments. To achieve this, the Government undertook a campaign to
generate high public awareness of ISAs, ensuring that they offered a broader
range of investment options, therefore making investments understandable
and accessible to more people. The Government has guaranteed that ISAs will
be available for at least 10 years from April 1999.
How
do ISAs work?
The key to understanding ISAs is to remember two simple
points:
 |
There are three ISA 'component'
parts - Investment, Cash and Insurance |
|
Furthermore, there are two overall
types of ISA - Maxi ISAs and Mini ISAs. |
A Maxi ISA allows you to select from across the
three options offered by a single ISA provider. You can invest up to £7,000
in the 2004/2005 tax year. The full ISA allowance can be invested in the
Investment component of the Maxi ISA, or alternatively you may place up
to £3,000 in Cash in 2004/2005 and £1,000 in the Insurance
element if available.
Mini ISAs offer a different approach and allow you to spread your ISA
investments across a range of ISA managers if you so wish, choosing a
different manager for each of your Investment, Cash and Insurance ISA.
Are
ISAs Tax Efficient?
The answer to this is yes, if you are a tax payer.
Investments within ISAs are exempt from Income Tax and Capital Gains Tax.
Interest from Cash ISAs and corporate bonds and gilts held in an Investment
ISA will be free from Income Tax. Even if you are a higher rate tax payer,
you will not have to pay any Income or Capital Gains Tax on your ISA investments.
You don’t have to include ISAs on your Tax Return.
Who
can invest in an ISA?
Any person normally resident in the United Kingdom
for tax purposes and who is 16 years old or older may invest up to the
maximum allowance in a Cash ISA each tax year and anyone over the age
of 18 may invest up to the maximum in any form of ISA.
How
easily can I obtain access to my investment?
As there is no ‘lock-in’ period for ISAs,
you can withdraw money at any time without losing tax advantages on your
investment.
Can
I move money between different investment types in a Maxi ISA?
No, ISA rules specify that money contributed to
the Cash section cannot be switched into the Investment component. Similarly,
money contributed to the Investment option of a Maxi ISA cannot be converted
into the Cash element.
What
are ‘CAT’-marked ISAs?
These are a specific type of ISA which meets Government
guidelines covering Cost, Access and Terms (hence CAT). All three types
of ISA component can qualify for a CAT-mark. The Cost limit varies with
each investment type and the Access and Terms criteria specify that investors
must be able to have access to their money at any time without penalty
and with no other restrictions and the ISA must also offer low minimum
investment amounts.
Should
I buy a CAT-marked Investment ISA?
This depends on your attitude to investment and
experience. In view of their lower cost, CAT-marked Investment ISAs will
tend to invest in basic funds that are designed to meet the needs of a
wide range of investors. For this reason, CAT-marked Investment ISAs may
be less appealing to experienced investors who wish to maximise their
long-term growth potential and who are more likely to seek specialist
funds to tailor-make ISA portfolios.
On the other hand, CAT-marked Investment ISAs could be ideal for inexperienced
savers and those new to stock market-based investment who want the reassurance
of buying an Investment ISA which meets certain criteria for low costs
and flexibility.
If
an Investment ISA does not have a CAT-mark. will it be a bad buy?
The presence or absence of a CAT-mark
cannot predict whether an ISA will prove to be a good or bad investment.
A CAT-marked ISA has not received Government approval of any kind, nor
is your money or investment return guaranteed in any way. Many industry-leading
funds with an outstanding record of long-term performance will not have
a CAT-marked fund available through an ISA. In fact, because specialist
investment funds tend to be more expensive to run, the majority of funds
available through Investment ISAs have not sought a CAT-mark. Investors
should not be worried by this.
How
can I tell whether an ISA has a CAT-mark?
This will be very straightforward because the ISA
rules require an ISA manager to clearly describe in the ‘Key Features’
section of their ISA brochure whether or not each particular fund has
a CAT-mark.
Contact Morgan Cameron ILP
Ltd. for advice on which ISA is most suited
to your attitude to investment risk and needs. |
