Your ISA questions answered

5 March 2008

Thanks to everyone who contributed to our live ISA chat with Anne Young, savings expert at Scottish Widows. If you didn’t get a chance to join in then we’ve compiled some of the best questions (and answers) from the chat which shed some light on the new ISA rules.

But if you’ve got an ISA-related question that hasn’t been tackled here then why not see if any other users can help by posting in the Moneywise forum.

Catriona: What exactly is an ISA and is it suitable even if I am only able to save very small sums such as £20 a month?

Anne Young: An ISA is an individual savings account and is a tax-free wrapper around savings accounts. As a result, no personal income tax is payable on any income you get from your ISA and no capital gains tax is payable on any capital gains you make. There are however limits on what you can invest in an ISA.

The overall limit for the current tax year is £7,000 into what is known as a maxi ISA, which will generally be stocks and shares or collective investments. Alternatively you can invest £3,000 into a cash mini ISA and £4,000 into a stocks and shares mini ISA.

The limits are going up in 2008-2009 to an overall limit of £7,200 into a combination of cash and stocks and shares with a limit of £3,600 into cash.

Even if you don't invest up to these limits, generally even smaller, regular sums can be invested on, say, a monthly basis and is well worth considering.

Michael Whitaker: Can I invest more than £3,000 a year in an ISA?

Anne Young: The investment limit in a maxi ISA is £7,000 in 2007/08. A maxi ISA must offer a stocks and shares investment and can also offer a cash component. You can only have one maxi ISA each year. In 2008/09 the limit goes up to £7,200.

The investment limit in a mini ISA is £4,000 in a stocks and shares mini ISA and £3,000 in a cash mini ISA. You can have a mini ISA in each category in the year.

In 2008/09 the distinction between a maxi and a mini ISA will disappear. You can put up to £3,600 into a cash ISA with the balance up to £7,200 in total into a stocks and shares ISA.

TonyE: Where's the safest place to invest an ISA?

Anne Young: It depends on what you mean by 'safest'. If you mean that your capital will not fall, the safest place is a cash ISA. However, the buying power of your money will potentially fall if the cash return doesn’t keep up with inflation. Stocks and shares ISAs are more speculative as generally the value can go down as well as up. However, in the long term they should produce the better return.

There is a half-way house however where the Stocks and Shares ISA can be a guaranteed one. This way if the investment is held for a minimum period of time (it depends on the product) you will not lose money and will benefit from uplift in the value which may depend on the stockmarket.

You should take advice from a financial adviser to find an ISA that suits your particular needs and circumstances.

JP Doogan: Under the new rules for next year is it possible to invest the second £3,600 with the same provider I spent the first £3,600 with? This would make things a lot easier to keep track of.

Anne Young: You can make the decision on where to invest your ISA allowance on a year-to-year basis. If you wish, this can be with the same provider every year.

Susan: What are my options if I want to invest my ISA ethically?

Anne Young: While the majority of ISAs available on the market do not choose their investments on ethical grounds, there are several ISAs that offer ethical investment. In narrowing down your investment choice you can sometimes ‘negative screen’ funds – exclude funds that invest in areas you disapprove of and/or ‘positive screen’ funds where you include funds that invest in areas you approve of.

It is best to take advice from a financial adviser on the subject before making your final investment choice.

Steven Oakes: A few months back I took out a NS&I ISA on a variable rate. With rates fluctuating as they are at the moment is it possible for me to transfer to a fixed rate?

Anne Young: You can transfer your cash Mini ISA with NS&I to a different cash ISA provider provided that provider is willing to accept transfers. It is all or nothing with NS&I – they do not allow partial transfers. This transfer doesn’t eat into the current year ISA allowance.

Alex: I have recently inherited £15,000 and have been wrestling with the best way to make that money work. Should I put it in an ISA, over pay on my mortgage. Do both? Neither?

Anne Young: It depends. As a general rule, it is probably better to pay off debt before you put money away into savings or investments. Personally, I would be inclined to do a bit of both, as I like the comfort of having a savings pot of money available to me, to either spend on luxuries, holidays or whatever - or even to just keep on saving for the longer-term, for the proverbial rainy day. It may depend on the interest rate you are paying on your mortgage and the rate of interest or return you can get from your ISA. You should probably take advice from a financial adviser to see what best suits you and your circumstances.

Randolphe Timtim: I've heard there are different types of ISAs available such as cash or equity. Which is the best one to go for?

Anne Young: You are correct. There are cash ISAs and stocks and shares ISAs. Cash ISAs are for those people who are not prepared to take a risk with their money and are looking for security in their investment. Generally, cash ISAs should be used for shorter term investments and where money needs to be accessible. However, equity ISAs are probably better for longer term investments.

As a general rule all of us should probably have some money in cash and some invested for the longer term. Which is best for you will depend on the length of time you want to invest the money for, the degree of accessibility and the degree of risk you are prepared to take with your funds. You should probably take advice as to which is best suited for you in your particular circumstances.

Coco Hopkins: Isn't an ISA just the same as a savings account?

Anne Young: Where we have savings accounts, as a general rule, we have to tax pay on any income from that savings account and any capital gains we make. The wonderful thing about ISAs is that there’s no tax to be paid on the income or capital gains arising for this investment. My mantra is: never pay tax if you don’t have to! So if you’re thinking of saving, your first port of call should probably be an ISA.

Laura: I have a cash ISA with a building society and want to transfer into an account paying a higher interest rate but the one I have my eye on (Barclays) doesn't accept transfers... What is the best way to get around this?

Anne Young: It sounds as though you have to make a decision here. You can stick with a cash ISA of which no tax will be payable or you can transfer the funds accumulated into an ordinary account on which tax will be payable. I suspect that the net return from your cash ISA account will be higher than the net return from your ordinary savings account after tax. Perhaps you should investigate the market further to see which cash ISAs are available. You may be able to get a better deal than the current one but still in a cash ISA.

Christie: I’ve used just over half my allowance this year but I am concerned that my current fund manager is charging too much, is it too late to switch now and if I do can I still use the rest of my allowance this tax year?

Anne Young: You can always switch your ISA from your current provider to another provider. Bear in mind that there may be charges involved in coming out of an investment and also in going to another, although there are many special offers at this time of year. Provided the switch is direct from fund manager to fund manager (whether within the same proider or not) you can put the balance from your ISA allowance into your 'new' ISA. Don't cash in your current ISA - and try and re-invest it - because you can only start one ISA in each tax year, and by switching you are not treated as having tried to stat another one.

Katie Tucker: I was surprised to find with my Barclays ISA that I was not able to put money back in that I had taken out, even though it kept me below £3000. Surely it makes no difference as long as the total amount that I have received tax-free interest for does not exceed the limit? Is this typical of ISAs?

Anne Young: The general rule, as regards ISA investment, is on the amount you can put into an ISA in a tax year. The limit that you can invest is £3,000 in the current year in a cash ISA. If you withdraw funds, you can’t replace them - your overall limit for investment is still £3,000. So, if you invest £3,000 in an ISA and withdrew £1,000 you still couldn’t replace that £1,000 in a tax year.

TomTom: Can you return to a previous 'financial year' and save money back into these years if you have missed out on doing so?

Anne Young: Absolutely not. It's a case of use your ISA allowance in the current year or lose it. The deadline this year is 5 April - so you have exactly a month to make your ISA investment work for you for the current tax year.

I Love Cesc Fabregas: Drip, drip, drip or a timely big bung?

Anne Young: You are a person after my own heart regarding investment! Not everybody can afford to make lump-sum investments. For most of us, our preferred - or indeed, only - option to save will be drip-feeding our savings. Ideally, lump-sum investments made at the bottom of the market would be preferred but since none of us know when the bottom of the market has occurred and, in any case, since few of us can afford to make one-off investments, direct debits are an ideal solution and you could start as soon as you can afford to.

Space invader: How long does my money need to be in an ISA before I can take it out?

Anne Young: As regards the general law, there is no time limit you have to keep your money in an ISA - you can put it in one day and take it out the next. This is not advisable, however. With cash ISAs, you need to be careful if there are penalties inherent in your cash ISA account, although there are some which allow total accessibility. With stocks and shares ISAs there are charges involved in investing in these ISAs so you may well not get the amount back that you put in. Apart from anything else, the value of these stocks and shares ISAs may well fluctuate according to movements in the stock market. As a general rule, cash ISAs can be looked at for short term investments, but stocks and shares ISAs should be considered for longer term investments.

A Campbell: Are ISA savings free of inheritance tax?

Anne Young: Although ISAs have got tax benefits as regards income tax and capital gains tax (CGT) the value of your ISA will be included in your estate for inheritance tax (IHT). What's more, unlike other types of investment you cannot hold an ISA in a trust which is a common way of moving assets out of your estate for IHT purposes.

Robert: How can I use a fund supermarket to take out an ISA?

Anne Young: With a fund supermarket you can spread your ISA investment in any year over several fund managers. This can be advantageous in spreading your risk, so is something you might want to consider.

Chris: I have £3,000 in a cash ISA for the current year. I have a further £1,500 to invest, can I also take out a stocks and shares ISA before 6 April and does it have to be with the same provider?

Anne Young: I presume you have put £3,000 in a cash mini ISA. You can put up to £4,000 in another mini ISA as a stocks and shares investment. It doesn’t have to be with the same provider.

Geoff Parker: I have been told that from 6 April my PEPs are being automatically converted to ISA Stocks and Shares. As a low risk investor is this change likely to change my level of investment risk?

Anne Young: As far as most of us are concerned this will not mean anything to our investment. It is just a way of simplifying the whole regulation of these savings products. If you are a low risk investor, you may have to review your current investments and if they are too risky for you, you may wish to consider a transfer to a low risk fund. Bear in mind, however, that you cannot transfer for a stocks and shares ISA to a cash ISA without actually cashing your ISA and then using the proceeds to do a cash ISA.

Malcolm X: I already have an ISA (with Invesco, though don't know which fund off the top of my head). My dilemma is that although I can see that I could squirrel away more tax-free money into this ISA, I don't think I can really spare it from my regular current or savings accounts because when it is in an ISA it seems so much more 'tucked away' and not for touching. Is this perhaps not correct in some way? Am I wrong to not put money while I can into an ISA even if I may need to draw on some of it at a shortish term future point?

Anne Young: An ISA account is not really 'untouchable'. You could withdraw funds from your Invesco ISA at any time. However, as a general rule, a stocks and shares ISA should be regarded as a long-term investment. Personally, I think it is perhaps a good thing for your long-term investment aims that you regard this money as being 'tucked away'. If you want to set up an account that is easily accessible then you should perhaps consider a cash ISA next year with only some of your funds being invested in the longer term in your stocks and shares ISA.

isa investin me money: When you transfer an old ISA to a new provider, how does this work when you open a new ISA, can you just transfer it in anytime?

Anne Young: You should contact your new provider and request that a transfer be made to them from your old provider. You will need to fill out some forms but that whole transfer process is relatively painless. This will be done between the providers without much involvement needed from yourself. You can do that transfer at anytime.

Elizabeth Davidson: Stocks & Shares ISA. With traditional stocks and shares, I believe when you sell them you may have to pay capital gains tax. What is the position if I take out (stocks & shares) ISAs please?

Anne Young: If you are really lucky and make a gain on your stocks and shares investment in excess of your annual exemption (£9,200 in 2007-8) you will have to pay capital gains tax. The rate of tax you pay will depend on your income tax rate, so it could be at up to 40% although with the benefit of certain relieves that are available if you have held your stocks and shares for a long time. From 6 April 2008, the rate of capital gains tax will be 18% for everyone. The benefit of a stocks and shares ISA is that no capital gains tax is payable on any gains, however large.

Mancunian: What is involved in switching my stocks ISA to a different fund within same provider (Scottish Widows in my case). Are there any fees involved?

Anne Young: If you consider switching from one ISA fund to another with the same provider, you need to ask if there are any upfront charges in investing in the new fund. I'm afraid this may be different from provider to provider.

Sue: The ISA offering has been virtually unchanged since it was introduced. In what ways could ISAs develop?

Anne Young: One of the developments that several ISA providers would like to see is the facility to switch or transfer from a stocks and shares ISA to a cash ISA. (Transfers the other way round will be permitted from 6 April 2008). This could help encourage people to invest in a stocks and shares since they would have the option to transfer to a 'safer option' if investment conditions proved troublesome. Other suggestions have been to give tax relief on ISA investments, although I suspect that hell will freeze over before this occurs!

Matt: I've got PEPs. What's going to happen to them after the new rules come in and will I be able to invest more into them?

Anne Young: Your PEP will be known as an ISA from 6 April 2008 but to all intents and purposes nothing will change. As regards future investments you actually do a new ISA on a year-by-year basis. You cannot put any more money into your PEP.

Joseph Polpot: I've got about £6,000 in savings and am unsure whether to put it into two mini ISAs or just one maxi ISA - is one better than the other?

Anne Young: If you do two mini ISAs you put £3,000 into a cash mini ISA and up to £4,000 in a stocks and shares mini ISA. Alternatively, you can put up to £7,200 in a maxi ISA. Which you choose depends whether you want to have some of your savings in cash and only some of your savings in stocks and shares. If this all of your savings I would suggest you have some in cash which is easily accessible. Your stock and shares investment should probably be one for the longer term. You should take advice as to which is the most appropriate for your particularly circumstances.

Zoe: Is it possible to compare the performance of investment ISAs? What is the first step to taking one of these out?

Anne Young: I would suggest you contact a financial adviser who should be able to give you an indication as to how the available ISAs in the market have compared over the last few years. Bear in mind, however, that past performance does not indicate how ISAs will perform in the future. Your provider should be able to point you in the right direct of an ISA that suits your particular circumstance.

Starting an ISA couldn’t be easier. You can either do it online with any of the ISA providing companies or with your financial adviser. I would suggest that you always that seek advice.

Wilshore Brown: About five years ago I lost a lot of money in a tech-based ISA fund. I've been put off using them ever since - are there stops and checks in place though now to ensure big losses are minimised?

Anne Young: Unfortunately, you probably went into this investment at the top of the market and lost money when the market in these shares fell. You should not let this put you off investing in the stock market although perhaps in future investment you might want to take a lower-risk view than tech shares.

There are some types of ISAs available that offer a safety net so that your money will never fall below that level. You get nothing for nothing in this world, so this safety net has to be paid for. As a general rule, in these type of ISAs your upside might be limited, but you may be happier with this type of opportunity. Do bear in mind that these so-called Captial Protected funds may be for a period of time such as five or six years, and there might be penalties if you cash-in before the end of this period. The alternative, of course, is a cash ISA but in the longer term, hopefully, a stocks and share ISA should out-perform cash.

To find the most competitive cash ISAs currently on the market check out our daily savings guide.

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