New rules
The new ISA rules effective from 6 April 2008
are as follows:
The overall annual investment limit for ISAs
for the 2008-09 tax year is £7,200. Up to £3,600 can be in
cash and the £3,600 balance in
stocks and shares, or the entire £7,200 can be in
stocks and shares only.
From 6 April 2008, the rules governing PEPs and ISAs
as follows:
- Existing PEP and TESSA only
ISA (TOISA) accounts will be re-designated as stocks and shares,
and cash ISAs, respectively;
- The distinction between mini and maxi ISAs is abolished,
with accounts being re-designated as "cash accounts" and "stocks
and shares accounts;"
- You can convert cash ISAs into stocks and share ISAs and
this will not count against the prevailing year's ISA allowance
(but you can't do the reverse);
- Money held in child trust fund (CTF) accounts can be rolled
over into an ISA once a child reaches 18.
The investmtent rules mean you can invest
£3,600 in a cash ISA and £3,600 in an equity (or stocks and shares)
ISA, or the whole £7,200 in an equity ISA.
Cash ISAs include bank and building society
deposits, and money market unit trusts. Some National Savings
products are also included, as well as a range of existing bonds
and accounts on which tax is normally payable.
A stocks and shares ISA can include any
authorised unit or investment trust, or open ended investment
company (OEIC), as well as any share quoted on a stock exchange
recognised by the HM Revenue & Customs.
So, what's best, cash or equities? That
depends on your attitude to risk and whether you are investing for
the short or long term. Equities have the potential for higher
returns over the long term and there is the opportunity for growth
both in capital and income.
Shares are more risky although risk can be
spread by investing in diverse portfolio of shares or via unit and
investment trusts.
Cash, on the other hand, is more secure if you cannot afford
to lose your initial capital and would be worried by stock market
volatility. It also gives you access to your money at short
notice, although remember that some cash ISAs pay higher interest
in return for giving notice which, in some cases, is as much as one
year..
Most banks and building societies offer cash
ISAs, but the terms and conditions vary considerably. Some
accounts require a minimum deposit when you open the account, while
others can be opened iwth just £1.
Some allow instant acess, while others
have a notice period for penalty-free withdrawals. Some allow
transfers-in from other cash ISAs, while others do
not. Some ISAs can only be managed
online.
Rates offered on cash ISAs are
often higher than on the same institution's standard savings
accounts, so this, together with their tax free status, make cash
ISAs a no-brainer for most investors.
Stocks and share ISAs (also known as
equity ISAs) are sold by stockbrokers, IFAs, fund managers, banks
and other authorised financial institutions. You can buy ISAs
directly with these institutions or you can take advice from an
independent financial adviser on where to invest.
If you want to invest in individual shares and choose your
own funds, a 'self-select' ISA may suit you. Unit trusts, Oeics and
exchange traded funds (ETFs) are the most commonly used
investment for stocks and shares ISAs.
How much an equity ISA costs depends on where
you buy it and what you invest in. The vast majority of ISAs come
with initial and annual management charges.
The initial charge on investment funds placed
within an ISA can range from 2.5 - 5 per cent, although many
firms offer discounts of 2-3 per cent off initial charges.
The annual management charge is
typically between 0.5 per cent and 2 per cent, depending on
the type of fund you invest in.
Direct
You can buy ISAs direct from fund managers,
which manage collective investment funds such as unit trusts,
open-ended investment companies (OEICs) and investment trusts.
However, this is not a cost effective way of buying as you
will pay the full initital charge, whereas by buying
from an IFA, you should get a discount.
Financial advisers
Buying through an IFA can be a good idea
ias you will get advice and most advisers will rebate
some of their commission so that the intital charge is reduced from
5-6 per cent to 2- 3 per cent.
You can also buy via 'discount brokers' and
'fund supermarkets' which also give generous disounts. In some
cases, you may not have to pay any initial charge at all..
For example, if you invest £7,200 and get
a 5 per cent rebate, you will save £360 in costs.
A few brokers will even split the annual
management charge (typically 1.5 per cent) with you, by rebating
to you some of their ongoing or ‘trail’ commission.
If you want to total control of your
investments, you might want to consider a self-select
ISA. These allow you to choose the shares or funds you
want to invest in yourself.
You can place unit trusts, open-ended
investment companies (Oeics) investment trusts, exchange
traded funds, plus individual equities, gilts and bonds into a
Self Select ISA.
These ISAs are generally sold by stockbrokers
such as Barclays Stockbrokers and The Share Centre, or investment
management groups, like Alliance Trust Savings.
But dealing charges vary considerably, so
check out the cost of share dealing and investment fund
charges before investing.