Tax Efficient Savings

ISAs are tax efficient and offer the potential for growth from some of the most exciting investment opportunities in the world - or greater security if required.

The Government state that they are keen to increase the number of people in the UK who save money to provide for the future. As we are all living longer, the financial strain on the welfare state needs to be assisted by people providing for themselves. Savings is an area where the Government offers tax breaks as incentives, but it is amazing to learn that around 25% of the UK population has no savings at all.

Many ISA offers will be tempting, but before you make your decision as to which one is best for you, it may be useful to read the following comments.

What is an ISA?
ISAs are simple, flexible, tax-free savings plans that are widely available and easy to set up. You can set up an ISA without giving instructions in writing, which allows them to be set up over the telephone or through the Internet. The ISA manager will then send you confirmation of what has been set up, which you can change if necessary.

You can also save in an ISA that will offer tax-efficient savings through a wide range of investments. There are hundreds of ISAs available but basically the come in two different forms, investment (or stocks and shares) ISA and cash ISA.

Investment - which includes unit trusts, investment trusts, investment companies with variable capital (ICVCs), gilts, equities and corporate bonds. Cash - which includes bank and building society accounts, National Savings and cash unit trusts.

You can choose to invest in either element of the ISA depending on your requirements and circumstances.

Who can Invest in an ISA?
Anybody over the age of 18 is able to save using an ISA as long as they are a UK tax resident. You can take out an ISA even if you are not currently working.

You and your partner are both able to set up an ISA as you get separate ISA allowances. You cannot take out an ISA with somebody else as each ISA must be individually taken out. However, you can subscribe to an ISA on behalf of someone else, for example as a gift.

1.      ISA type To 5th April each tax year

2.      Investment ISA Up to £7,000

3.      Cash ISA Up to £3,000

There is an overall maximum investment limit for ISAs in each tax year and separate limits for each element as shown above.

You can invest up to £3,000 cash in an ISA for the current tax year.

If you have any cash sitting on deposit in the bank or building society it may be advantageous to place some of this money (having left yourself an adequate emergency cash fund) into a cash ISA, because money on deposit with a bank or building society is normally taxed at your highest rate of income tax. Cash ISAs can include some National Savings products, cash unit trusts and bank and building society accounts and all interest will be tax-free.

The Investment element of an ISA can be in funds such as unit trusts, ICVCs or Investment Trusts. You may also choose to invest directly into shares or corporate bonds.

If you take out an ISA with cash elements, your remaining allowance can be in an investment ISA. You may prefer to invest your whole allowance in an investment ISA.

There are benchmarks set by the Government to provide assistance to investors when choosing an ISA. They cover Cost, Access and Terms. There are three sets of "CAT" standards, one for each element of the ISA and the common themes are as follows.

Clear straightforward treatment of investors and advertising in plain English No requirement to buy another product An undertaking that the provider keeps to the CAT standards after the ISA is set up

However, a CAT marking is just a template for a certain type of ISA. It does not necessarily mean that a CAT marked ISA will be the best performing or the most suitable product for you. In reality ISAs offer a broad range of benefits and so the most suitable product for you depends upon your needs and circumstances.

This is where our advice will prove invaluable.

There is a choice between many individual ISA managers. Some managers only offer Cash ISAs. Others offer all the elements.

Different providers inevitably offer different rates of return, different charges and different levels of service. It is likely that there will be marketing incentives such as bonus points or other loyalty prizes offered by some providers.

Because of the large number of ISA providers and the different types, it may be in your best interest to invest with two separate ISA managers each tax year who specialise in that particular area i.e. cash management and investment. This is the area where we can advise you and help you make the right choice.

Mini and Maxi ISAs
The Government has introduced two different vehicles for the ISA, the 'Maxi' and the 'Mini'. Within each of these two vehicles there are several investment routes.

You can choose to invest through either of these two vehicles, but you can't invest through both in the same tax year. Should this be the case, your secondary investment will be void and any tax advantages received will be repaid to the Inland Revenue. Maxi and Mini ISAs differ in the following ways:

Maxi ISAs enable you to save the full £7,000 entitlement in the current tax year in stocks and shares, potentially the highest performing savings vehicle. Alternatively, in the same tax year, you can save less than the full amount into stocks and shares with up to £3,000 in cash. You must select a single fund manager, and should remember that you can only apply for one Maxi ISA in each tax year.

Mini ISAs allow you the flexibility to save with up to two different ISA managers, enabling you to create an investment portfolio ideally tailored to your needs. However, with Mini ISAs, for the current tax year you can save £4,000 a year in stocks and shares - and no more than £3,000 in cash.

PEPs
If you already have money invested in a Personal Equity Plan you can leave it where it is or switch to another PEP provider. PEPs were abolished in April 1999 and it is no longer possible to invest any more money in a new PEP.

It may be worth continuing with your PEP as they offer similar benefits to ISAs. This means no income tax, no capital gains tax, a 10% tax credit on all dividends from UK shares within this investment until 5th April 2004 (but after this date the total credit will be nil), flexibility, the ability to cash in at any time and a range of PEPs to match your needs.

The questions you should ask are:

1.      Is performance up to scratch?

2.      Are my income and growth needs met?

3.      Are the charges and return competitive?

4.      What happens to my regular payments in the future?

TESSAs
After April 5th 1999 investors were also unable to take out a new Tax Exempt Special Savings Account. However, you can continue to pay into an existing TESSA for the full five years. Many ISA managers offer TESSA-only Cash ISAs for investors who want to move the money in their maturing TESSA into an ISA.

The investment limits for TESSAs taken out before 6th April 1999 remained at £9,000 over the five-year term.

Tax Benefits
Your ISA will benefit from tax-free growth, free of all income tax and capital gains tax. UK shares within the Investment are subject to a tax charge on dividend income since 5th April 2004.

Cashing in an ISA
There is no minimum period for ISAs and you can take money out at any time without losing tax relief. This may not be the case if you choose to save in an ISA that offers extra benefits but gives less flexibility.

Remember that the investment ISA element should be viewed as a medium to long term commitment (5 years+) and the value of investments and any income from them may fall as well as rise and investors may get back less than they originally invested and past performance is no guarantee of future performance.

Speak to us about your ISA or reviewing your existing PEP investments We can advise you on the best options available to you. We will ask you about how much you can afford to invest, what your aims are, when you need the money, the risks you are prepared to take and explain anything else you want to know about.