ISAs, Maxi ISA and Mini ISA - Premier Financial Solutions

What is an ISA and how much can I invest?
The ISA is basically an "envelope" into which you can place investments to give them tax efficient status.

Individual Savings Accounts (ISAs) are tax-free Savings accounts which means individuals do not have to declare any income or capital gains they receive to the Taxman. Individuals can save up to £7,000 each financial year. A financial year runs from 6th April until the 5th April the following year.

ISAs were brought in by the Government in April 1999 to replace Tax Exempt Special Savings Accounts (TESSAs) and Personal Equity Plans (PEPs) and are guaranteed to run until at least 2010.

There are two types of ISAs - Maxi ISA and Mini ISA.

An individual can only subscribe/contribute to either one Maxi ISA or up to two Mini ISAs (one for each component), each tax year. Money cannot be invested in both a Mini and Maxi ISA in the same financial year.

New rules to simplify ISAs

These will come into force in April 2008.

The reforms will remove the distinction between maxi and mini Isas (see below) and allow transfers from a previous year's cash Isa into a stocks and shares version.

Investors who still hold Peps will be able to transfer their money into an Isa wrapper, and children with child trust funds will be able to roll over their investment into an Isa on their 18th birthday.

As well as simplifying the rules, the reforms will also make Isas a permanent fixture of the savings landscape, with the government pledging that the maximum annual investment will always be at least £7,000.

Higher limits for annual investment in individual savings accounts (ISAs) will come into force from 6 April 2008.

You will be allowed to save up to £3,600 in a cash ISA and up to £7,200 in a stocks and shares ISA from 6 April 2008 within an overall annual savings limit of £7,200

What investments can I hold inside an ISA?
Maxi ISAs and Mini ISAs are made up of 'components'. There are two different components people can invest their money into. The different components are: - Cash and Stocks & Shares (Equities).

A. STOCKS AND SHARES

This component allows individuals to invest in collective shares, for example, Unit Trusts, Investment Unit Trusts, shares listed on a recognised stock exchange, bonds and gilts and Life Assurance. This type of ISA is good if individuals are able to leave their money alone for a long period of time, usually over five years, and are comfortable taking on the risk of market fluctuations in the value of their investment.

With these types of accounts there is no guarantee that the return at the end of the term will exceed the amount invested

B. CASH

This component allows individuals to invest in Building Society deposits, UK and European authorised Bank deposits, cash unit trusts or National Savings. This is a good choice for short-term savings especially if individuals want to access their money easily. The cash component allows individuals as young as 16 years to open either Mini Cash ISAs or the cash component of a Maxi ISA.

With Cash ISAs investors will benefit from a minimum return amounting to the sum invested over the term plus interest.

What is the difference between a Mini and a Maxi ISA?

In addition to the different types of investments that can be held within an ISA, there are also two types of ISA to invest in:

Maxi ISA

One ISA provider manages the Maxi ISA. It must offer the stocks and shares component and may also offer cash.

If you wish to invest your full £7000 ISA allowance in stocks and shares, you can only do so through a maxi ISA as the maximum that you can invest in mini ISA stocks and shares component is £4000 a year.

Mini ISA

Individuals can only invest in one component of a Mini ISA each financial year. Unlike the Maxi ISA, the amount you can invest is fixed for each component being £4000 a year into stocks and shares and £3000 into cash.

IT IS IMPORTANT TO REMEMBER THAT YOU CANNOT INVEST IN BOTH A MAXI AND A MINI ISA IN THE SAME TAX YEAR AND THAT YOU CAN ONLY HAVE ONE MAXI ISA IN EACH TAX YEAR, PROVIDING THAT YOU DON'T ALSO HAVE A MINI ISA IN THAT TAX YEAR.

What is the Tax position of ISA's?

All investments and deposits held within an ISA are free from income tax and capital gains tax.

Investors used to receive 10% tax credit on dividends from UK equities. This was removed from April 2004, meaning that such dividends are now taxable, although there will be no further tax liability, even for higher rate taxpayers.

However, investments in corporate bonds and gilts are free from tax and the provider is able to reclaim the full 20% tax credit.

What are the advantages of investing in the Stocks and Shares part of an ISA?

The stocks and shares element of the ISA will allow you to choose shares yourself ,or to take advantage of the pooled resources and broad spread of risk offered by a collective investment that brings together the shares of many companies.

The stocks and shares element can be invested in most unit trusts, investment trusts and OEICS. These will managed by a professional fund manger who will buy and sell shares on your behalf, with the aim of achieving the maximum possible return on your investment.

What is the minimum investment period of an ISA?

Many ISA's do not have a minimum investment period, however, it is important to remember that any investment in stocks and shares or life assurance should be considered as a medium to long term investment.

It is also important to consider any costs or penalties that may be imposed by different providers should you wish to surrender or cash in your ISA.

What should I do now if I want to Invest in an ISA?

If you would like to look further into investing into an ISA, you can e-mail us at isas@premierfinancialsolutions.co.uk

Alternatively you can call us on 0845 226 4823 between 9am and 5pm Monday to Friday when we will be happy to discuss your requirements. We are able to offer a full advice service and recommend the most suitable ISA for your circumstances.