Five Changes For Your ISA

There are five new things to be aware of regarding ISAs. No need to worry though, because it's pretty much all good news!

After being largely untouched for eight years, the government has just released a raft of rule changes for everybody's favourite tax-free savings vehicle: the ISA.

The changes were first outlined in this year's Budget but they were clarified last week. Unlike the recent mish-mash of new rules for pensions, the changes are largely positive and will make ISAs simpler. Hurrah!

All the changes take effect from the start of the next tax year, which begins on 6 April 2008.

1. Higher limits

Let's start with the best news. Finally, ISA limits are going to be raised! The total annual limit will go up from £7,000 to £7,200. Within this, the cash allowance will rise from £3,000 to £3,600.

It's about time, I hear you cry. Although the cash increase is quite generous, the £200 increase to the main limit seems fairly stingy. Let's hope this is just the first of a regular series of annual increases, as we see on most other tax allowances.

2. Available indefinitely

Initially ISAs were going to be available for 10 years from 1999. Now the government has changed this to the rather vague "indefinitely". As far as tax policy goes, this is as good a promise as you're likely to get. It would be a brave government that takes away such a popular tax break as ISAs, so I would guess we're safe for quite some time.

3. Cash can go into shares

This is probably the most complex change being introduced.

The old distinction of Maxi and Mini ISAs is no more. Now you'll be able to put up to £3,600 into a cash ISA. Whatever's left, up to a limit of £7,200, can be put into shares.

The tricky bit is that any cash ISA you have can now be converted into a share ISA. However, you can't go in the direction, converting share ISAs back into cash.

Cash ISAs are by far and away the most popular form of ISA. 10.4m people invested a total of £22.6b into them last year. By way of contrast, just £10b went into share ISAs.

In some respects, it's good to see the government encouraging people to take a longer-term view, as shares offer better returns. However, you can bet there will be a massive marketing push from next April with banks encouraging people to move cash ISAs into dodgy, high-cost funds.

4. PEPs disappear

PEPs are the ancestors of ISAs, which were brought in by the Conservatives in the 1980s. They still retain their tax-free status although some of their rules differ slightly from ISAs. As of next April though, they will all be converted into share ISAs.

This will allow investors to consolidate their investments rather than having a separate pot for PEPs and ISAs. So that'll be handy. It should also mean we pay less in annual account charges as a result.

5. Child Trust Funds can become ISAs

Any money in a Child Trust Fund (CTF) will be eligible to be rolled into an ISA once your child turns 18. Although no one has to worry about this until at least 2020, it's great news. Some children could have several thousand pounds in their CTFs by then, and being able to preserve the tax benefits for longer will give them a much better chance of building a sizeable nest egg.

That is, of course, if they don't spend the money on cars, booze, university fees, ring tones, a Playstation 10 ........

For more information, visit the Fool's ISA centre and ISA discussion board.