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What is an ISA?
Individual savings accounts (ISAs) were introduced by Labour in 1999 as a replacement to PEPs and Tessas. The ISA is not a financial product in its own right but rather a tax free entitlement that can be wrapped around cash or shares. Cash ISAs are simply another form of savings account where the interest is not taxed of which there are many different types. The Share quota is commonly used in Collective Investment Vehicles or Unit Trusts. However there is the option of creating a self-select ISA where certain eligible shares are selected by individuals or managed by stockbrokers. Share ISAs benefit from two tax incentives. Any increase in share prices are CGT exempt and all tax paid on bonds can be recuperated. A maximum of £7000 can be placed in ISA schemes over a Tax year.
Mini and Maxi ISAs
The Mini ISA system involves having two separate wrappers. The cash half can be placed around cash up to £3000 and the share allocation on shares up to £4000 in value. The reason for taking this route is to minimise the share exposure of an individual. The Maxi ISA allows you to invest the full £7000 allowance in shares, you are however able to invest upto £3000 in cash with the remaining £4000 in shares but you only have the one wrapper unlike the Mini cash ISA
Top Tips:
- Choose wisely between the Mini and Maxi ISA as you are only entitled to to one type each tax year whilst you can have a combination of Mini and Maxi ISAs over the years you can not change from one to the other once opened.
- There is no set period to hold the investment and they can be accessed at any time. However, once accessed the wrapper is used up on that part of the investment and it cannot be replaced.
- ISAs can be purchased from IFAs, Discount brokers. Stockbrokers, Banks, Building Societies and direct from Product providers chose one that best suits your needs
- Understand the charging structure of your ISA.
- Monitor your investment performance as you can change to a different fund or provider if it is not performing well.
- Watch out when changing ISA provider. Make sure you get your new provider to move the money and whatever you decide, DO NOT take the money out and move it yourself, you will lose the ISA benefit for that year.