ISAs

Existing PEPs and TESSAs

If you already have money in a PEP or a TESSA, there is no need to close that account before you buy an ISA.

PEP money can continue to grow tax efficiently and you can also move money from one PEP manager to another without losing your investment's PEP status.

If you have money in a TESSA, when it matures at the end of its 5 year term you can reinvest the capital of up to £9,000 into a TESSA-only ISA. This will not eat into your ISA allowance for the year.

Individual Savings Accounts (ISAs)

Every UK resident adult should consider taking out a tax-efficient Individual Savings Account (ISA).

ISAs replaced new investment in PEPs and TESSAs in April 1999, and currently allow you to save up to £7,000 a year without you having to pay tax on either the income the investment generates or its capital growth.

ISAs come in many different forms. You can choose ISAs which invest your money in a bank or building society account, a collection of stocks and shares, or a with-profits life insurance policy. There are two main types of ISAs, one is a maxi-ISA the other is a mini-ISA. You cannot mix and match maxi and mini ISAs. You can have either one maxi equity ISA or one or two mini ISAs for each tax year. Some ISAs have a CAT mark, indicating that they meet minimum standards on Charges, Access and Terms. Others do not.

The distinction between mini-ISAs and maxi-ISAs is an important one. Once you make your choice for the year of a maxi or mini-ISA, you are locked into that option for the remainder of the tax year, and plumping for the wrong one can dramatically cut the amount you are allowed to invest tax efficiently in an equity ISA.

Each type of ISA brings its own risks, and each will be suitable for a different type of investor. An IFA can help you sort out which type of ISA is right for you, and help you to avoid the many pitfalls which the choice of products present.

Type of plan	Where your cash goes	Current maximum* investment allowed in the tax year
Cash mini ISA	Bank or building society deposit account	£3,000
Equity mini ISA	Equities, bonds, unit trusts, OEICs, investment trusts, life assurance	£4,000
Equity maxi ISA	Equities, bonds, unit trusts, OEICs, investment trusts, life assurance	£7,000

*In future years maximum levels may reduce or increase.

Remember, you can have one maxi ISA investing in equities for each tax year or one or two mini ISAs as long as they are one of each type.

Corporate or Government Bonds

When you buy a bond, you are lending money either to the UK Government or to a company in return for a fixed rate of interest.

Government bonds - known as "gilts" - are a particularly safe form of investment, because you know you will get your capital back at the end of the gilt's term, plus regular income payments at a predictable rate. Your money is at risk only if the UK Government defaults on its loans - which is very unlikely.

The bonds issued by individual companies work in the same way. If you select a big company with sound finances, the risk involved should be only a little higher than when buying a Government bond. Both corporate bonds and gilts can be wrapped inside an ISA to save tax. Investments like these are available as part of your equity ISA allocation for the year.

How it works

An ISA is sometimes referred to as a 'wrapper'. It means you can 'wrap' up to £7,000 of your money in an ISA so that any money you make on it is sheltered from tax. You can invest from as little as £50 per month, in lump sums from £500 or you can choose a combination of both.

Tax and legislation are likely to change. The information given here is based on our understanding of law and HM Revenue & Customs practice at the date of publication.

Your Investment Goal

To be able to pick which ISA fund(s) are suitable for you, you should think about what your investment goal is. When investing in an ISA there are really three choices, depending on your goal:

You can choose to invest in a fund for growth or income or both. Equities and Bonds are known as Asset Classes and their specific characteristics may make them suitable for different investment aims.

If your goal is a long way off, such as paying for your children's education - equities could be the route to take. If your goal is to provide additional income in retirement, for example, you may want to invest in bonds.

Choosing a fund

When you buy an ISA, your money is invested into the fund or funds of your choice.

A fund is known as a Collective Investment where your money is pooled with other investors. Rather than being able to buy shares in one company, there is more money to buy more shares in a wider range of investments.

You should also consider the fund's risk level, choosing a level you feel comfortable taking. All our funds have a 'volatility rating' to help you decide.

The charges

You pay a charge to invest in the fund - the amount varies from fund to fund. The charge is a percentage of the amount invested and normally ranges from 0% to 5.50%. This is taken from the amount you invest on receipt of your payment.

Charges are not normally guaranteed and may be altered to reflect changes in costs.

Before you make your investment decision, it's important that you understand how it works, the risks involved and what a decision to buy could mean for you. The following are a few common questions about investing in an ISA. If you require more detailed information or advice, please contact us.

References to taxation and legislation are based on our current understanding of law and HM Revenue & Customs practice. Taxation and legislation may change in the future.

What are the benefits of an ISA?

There are many benefits to investing in an ISA.

Tax efficient savings

You don't have to pay tax on any money your investment makes for you.

No need to declare your ISA on your tax form.

ISAs attract tax reliefs, which the Government may alter in future. The value of these reliefs to you depends upon your own financial circumstances. At present we recover for you the tax at 20% deducted from interest distributions.
 
The value of an investment in any of these funds can go down as well as up and you may get back less than you invested. The sterling value of overseas assets in these funds may also rise and fall as a result of exchange rate fluctuations.

How long should I invest for?
Stockmarkets can be fairly volatile in the short-term. They do offer you the opportunity for greater long-term returns. We recommend investing for at least five to ten years.

What if I need help choosing a fund?

You should consult your independent financial adviser who will advise what is best for you.