Are the ISA rule changes enough?
Major changes to individual savings accounts come into force in April 2008 to make these products simpler and more flexible for investors. But critics claim more needs to be done to encourage saving.
According to Kitty Ussher, economic secretary to the Treasury, the aim of the reforms is to encourage more people to save, as well as give them more control over where their money is invested.
“The ISA has been successful in helping more people to save in a tax-efficient way,” she said. “These reforms will build on that success, making them even more attractive by allowing people to save more and being more flexible to use.”
Industry experts broadly welcome the changes, but many feel the government could have gone even further; the introduction of higher limits and removing taxation on other savings products, they suggest, would give savings levels a huge boost.
“I don’t think enough is being done to encourage people to save. We often hear officials saying we need to take responsibility for our futures and that’s fine if you have the means to sit in front of an independent financial adviser,” said Kevin Mountford, head of savings at comparison website moneysupermarket.com.
“But the average man on the street relies on cash-based solutions. Even dabbling in simple equities can be a stretch too far.”
Research from Intelligent Finance backs this view. Almost 80% of those polled support the idea of raising the cash ISA limit to £5,000, while 68% want to see ISA thresholds in general raised to at least £10,000.
But how can you make the most of the current regime?
As far as cash ISAs are concerned, ensuring you’re getting the highest possible interest rate is the best way to make the most of the tax efficiencies on offer, and this can mean switching providers. This should be relatively easy. You fill in a transfer form supplied by the provider you wish to move to and then it will organise moving your assets from your existing provider.
If you want to change to another ISA, there’s plenty of choice in the market, with 193 cash ISAs available, according to Moneyfacts.
“The most competitive rates are often launched around the end of the tax year and into the new tax year,” said Julia Harris, a spokesperson for Moneyfacts. “However, the best rates are very popular, so don’t hang around.”
There are a few things you need to remember. Don’t just take money out in the hope of reinvesting it because it will no longer be viewed as an existing ISA investment and simply count towards your existing annual allocation. It must be transferred following the procedure above.
Second, check your chosen provider accepts transfers of existing assets, because they aren’t welcomed by all. Finally, keep an eye on potential catches with regard to bonus periods or notice terms. The Moneywise daily round-up of the best ISAs on the market can help you decide which is the best product for you.
“The process should be quite simple – like switching your bank current account – as there will be dedicated teams on hand to help,” explained Mountford. “That’s the theory, although the reality for some people has been rather different.”
The process is certainly not problem-free – as can be seen from the number of complaints about ISAs that are investigated each year by the Financial Ombudsman Service. During 2006-07, 252 new complaints were received about cash ISAs (down from 314 the previous year), while 521 were made by investors with a grievance about a stocks & shares ISA.
According to Emma Parker, spokeswoman for the FOS, the majority of complaints related to claims of a missed opportunity to invest because of a delay or administrative mistake by a financial services provider.
“A significant proportion of ISA contributions are made shortly before the end of each tax year and so any delay on the part of the firm can potentially lead to the opportunity being missed,” she said. “The other strand of complaint we see in relation to investment ISAs relates to suitability.”
Where it gets complicated
If you’ve got a stocks and shares ISA, deciding to transfer your investments is a little more involved, warned Anna Bowes, savings and investments manager at AWD Chase de Vere, with more than just savings rates to think about. But it’s certainly worth looking into.
“People should review their ISA portfolios for a couple of reasons,” she said. “The first is to ensure that the funds they have meet their objectives in terms of risk and investment style, such as growth or income. If their objectives have changed they may need to alter their fund selection to suit.”
If you do need to switch, it is straightforward – you can have all your assets, or just a percentage, transferred to a new provider simply by filling in an application form.
Again there’s plenty of choice, with 65 fund providers, according to Moneyfacts. Just be sure you know why you are switching. Don’t automatically move because the fund has suffered a bout of poor performance, as this could be due to a number of reasons.
For example, the area in which it invests may have temporarily fallen out of favour, or a new manager may have taken over and is transforming the portfolio in the hope of bolstering returns. And don’t forget that you need to take a long-term view with equities.
Something else to bear in mind is charges – those levied by your new provider as well as any potential exit fees you may incur.
“Charges can vary enormously, although they have become a lot more competitive, and when you get near the end of the tax year you will see there are special offers,” said Bowes. “You can pay from nothing to more than 5% for an initial charge with some, while others have no initial fees but levy an exit penalty for taking money out within five years, or have a slightly higher annual management charge in place.”
However, while charges are important they shouldn’t be a defining factor. “If you pick something that’s 1% cheaper but it underperforms by 2% or 3% each year, that’s a false economy.”
The best option is to scan the key features document that comes with every fund before deciding, and to compare the ‘Reduction in Yield’ figure which illustrates the effect charges can have on the returns generated.
“If you are moving because of your personal situation – and not because you’ve lost faith in the ability of the fund management company to look after your money – then it’s worth seeing if they have a more suitable fund,” added Bowes. “If you transfer internally it will often be easier, quicker and cheaper.”
New ISA rules: fast facts
• ISAs are available indefinitely – there is now no set end date for them
• Every adult can invest up to £7,200 a year. Up to £3,600 can be saved in cash with one provider. The remainder can be invested in stocks & shares with either the same or more than one provider
• All PEP accounts will automatically become stocks & shares ISAs
• Money saved in cash ISAs can be transferred into stocks and shares ISAs
Key features document
The key features document (KFD) gives consumers the main points about any financial product or service they are considering purchasing without having to resort to the fine print. The KFD must include key headings outlining the product, its features, benefits, aims, risks and the requirements the consumer has to meet as well as a Q&A section. Although no two KFDs are exactly alike (each product requires a bespoke KFD), the FSA issues guidelines for how financial services companies should present the KFD to prospective customers.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.