Why You Should Open An ISA This Year

6th April saw new rules take hold which will simplify ISAs. But is that good news for you?

The government seems to love tinkering with tax-free savings. The new financial year is no different with an overhaul of ISAs. True, the new improved ISA is far less complex than before but is it actually any better?

Half a dozen key changes have been put into action as part of the revamp. I'll run through each one and assess whether it's a good move. So, let's kick off with the new ISA allowance:

1. Annual ISA allowance

The annual ISA allowance has been raised from £7,000 to £7,200 which you must use - or lose - by 5 April 2009. Of that amount, £3,600 can be paid into a cash ISA, up from £3,000 in the previous tax year.

While it's good news the ISA limits have been increased, £200 isn't really worth getting excited about. That said if you're interested in cash savings, a £600 increase is far more generous.

On the plus side, a limit of £7,200 is easily divisible by 12 allowing for nice round monthly payments of £600 instead of the previous monthly maximum contribution of £583.333333...you get the picture! But the allowance is still far below where it should be. ISAs were introduced in 1999 and this is the first rise in the limit since then.

There's also no commitment from the government to step up the allowance in future years, so who knows how long we may be stuck at £7,200?

2. Mini and maxi ISAs

The concept of mini and maxi ISAs is quite possibly the most confusing rule in ISA history. Thankfully the entire distinction between the two has disappeared.

As a quick recap, if you had chosen a maxi ISA you could do the following:

• Invest up to £7,000 in stocks and shares or,
• Combine stocks & shares with cash as long as no more than £3,000 was held in cash and no more than £7,000 in total
• Hold your maxi ISA with one provider

Alternatively, you could have gone for mini ISAs instead which allowed you to:

• Invest up to £4,000 in stocks & shares and,
• Invest up to £3,000 in cash
• Hold your mini ISAs with two separate providers - one for stocks & shares and one for cash

These rules weren't particularly easy to understand, so it's great that we'll never need to talk in terms of minis and maxis again. Just plain old ISAs will do nicely thank you very much!

3. Two separate ISAs

You'll still be able to invest in two separate ISAs each tax year if you wish. In other words, you'll be able to go after the best-performing fund for your stocks & shares component with company A and the most competitive interest rate for your cash component with company B. Just makes sure you don't exceed the investment limits.

Remember, you don't have to choose two ISA providers. If you have found a provider that you like for both then just stick with one. Of course, you may not want to invest in both, in which case one provider is all you need.

4. Cash ISAs

Under the old regime there were several types of cash ISA. These were:

• Mini cash ISAs
• Tessa-only ISAs - which held the matured proceeds of old TESSAs (tax-exempt special savings schemes)
• The cash component of a maxi ISA

Luckily, they are now all known quite simply as cash ISAs no matter where they originate from.

5. PEPs

PEPs - personal equity plans - were the forerunners of ISAs but many have long since been forgotten. Now PEPs (which were always invested in shares) automatically become stocks & shares ISAs.  

6. Finally, cash transfers

You can now transfer money saved in a cash ISA and move it into a stocks & shares ISA. If you want to use your ISA to build up a nest-egg then arguably shares is the place to be as it has more potential for capital growth over the long-term.

That said, shares are more risky and may not suit everyone. Unfortunately, those of you who already have stocks & shares ISAs won't be able to transfer them to cash so this change hasn't gone far enough.

Let's say you're due to retire and you want to reduce your exposure to shares. Under the current system you'll need to close your stocks & shares ISAs which means you may no longer benefit from a tax-free return.

I think six major new rules is quite enough! Overall, the changes have been for the better. If you have money to spare, ISAs should always be your first port of call and it's still Foolish to make the most of your tax-free allowance.

More: My favourite ISA! | Earn A Tax-Free Return of 543%! | Choose an ISA at The Motley Fool ISA Centre