Personal Investments

ISAs were launched on 6th April 1999 by then Chancellor Gordon Brown, as a replacement for both Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs).

Initial rules dictated an annual contribution limit of £7,000 for only 5 years, however, due to the continuing popularity and the Government’s drive to encourage individuals to save, this has been extended twice and will now continue to apply until 5th April 2010.

Announced in the Pre Buget Report (PBR) on 9th October 2007, and ratified within the recent Budget on 12th March 2008, a number of changes have come into effect from 6th April 2008. These have been detailed in a recent article, Individual Savings Accounts (ISAs) - A New Regime.

The annual contribution limit has increased to £7,200. Of the annual allowance, up to £3,600 may go into qualifying cash deposit accounts and National Savings. The balance may be held in equities or collective funds such as unit trusts or investment trusts. Alternatively, the whole £7,200 may be invested in equities with no cash holding. Note that with effect from 6th April 2008, ISAs have been restructured to remove the distinction between mini and maxi ISAs.

Obviously, if there is a desire to build up deposit based tax-free savings, then investing into cash will be highly appropriate. Please be aware that this will restrict the amount that may be invested into stocks & shares, although note that cash holdings within an ISA may now be transferred to stocks & shares, although not vice versa.

Investors will be entitled to exemption from Income Tax and Capital Gains Tax (CGT) on their investments, although the tax credit of 10% applying to dividends is not able to be reclaimed by ISA managers. Therefore, there is no longer an Income Tax advantage for basic rate taxpayers holding assets within ISAs. For higher rate taxpayers, there continues to be a benefit as there will be no further Income Tax liability on dividends received. Regardless, the CGT exemption still applies.

It is also worth noting that fund management groups often offer a discount for investing within their ISA product compared with it’s standard unit trust or OEIC funds.

In conclusion, unlike pensions, whilst there is no tax relief on contributions made to ISAs, withdrawals made from the plan are tax-free. Furthermore, there is no minimum age applying from which you may take benefits and no upper parameters applying to restrict benefits that you may draw, giving you complete flexibility to take as much or as little as you require each year. In summary, it is the flexibility, tax efficiency and the guarantee of CGT free gains which is why they remain popular with investors. It is also why we consider them to be highly complimentary to pension investments when undertaking retirement planning for a client, particularly where an earlier retirement than that permitted via a pension is being planned for.