Questions About ISAs

Got any questions about the reform of ISAs? Here are some answers.

Gordon Brown confirmed last week that the tax-efficient Individual Savings Account (ISA) is to become a permanent fixture on the savings and investment scene.

Created in 1999 to replace the TESSA and PEP, 16 million people now have an ISA, more than twice the number of savers who held its predecessor. And as at 5 April 2006, £111 billion was held in cash ISAs and £70 billion in stocks & shares ISAs.

True to form though, the Chancellor couldn't resist tinkering with the current format of the ISA although, for once, his aim seems to be to simplify the rules instead of his usual trick of making things as complicated as possible. What follows should answer some of the questions you may have about the changes.

1) Has the Chancellor increased the current annual investment limit of £7,000?

No, although he has guaranteed that it will remain at a level of at least £7,000. However, there will be more flexibility in that an individual will be able to save, say, £1,000 in cash with one provider and £6,000 in stocks & shares with another provider.

Unfortunately, this doesn't apply the other way around, so you will still be restricted to saving a maximum of £3,000 in cash.

2) The Chancellor is removing the distinction between Minis and Maxis. How will this work in practice?

Essentially, the Mini and Maxi labels will cease to exist and savers will be allowed to save in two components: cash and stocks & shares.

So you can hold a Cash ISA and a Shares ISA with either the same or different providers -- the words 'Mini' and Maxi' will no longer be relevant although investors will be held more responsible for ensuring that their overall contributions to both do not in total exceed the £7,000 limit.

3) Are there any changes to how I can use the money I already have in previous ISAs?

Yes. Ever keen to promote investment in shares, the plan is to allow individuals to transfer funds from cash subscribed in previous tax years to the stocks & shares component, without affecting the annual investment limit.

So, a saver with, say, £12,000 accumulated in the cash component in previous tax years will be able to move some or all of it into the stocks & shares component, and still invest a further £7,000 into their ISA in the current tax year.

Unfortunately, you won't be able to do it the other way around. If you sell any shares, the cash has to be re-invested in the stock market fairly quickly and in the meantime, any interest accrued is taxed at a flat rate charge of 20%.

4) What will happen to my old PEPs?

PEPs are to be brought within the ISA wrapper to enable investors to merge their share investments. The idea is to make it easier for investors to manage their funds more effectively and to cut administration costs for providers.

It means that funds that were held in PEPs can be invested in the full range of ISA qualifying investments and, in a new benefit for ISA investors, investment trusts with rental income will now be permitted in ISAs --something previously only permitted with PEPs. The Government is expected to impose the same 20% flat rate charge on interest accrued on uninvested PEP cash whereas before you could escape it by only withdrawing less than £180 a year.

And finally, the good news is ISAs are proving popular with young people and those in lower-income groups To encourage further saving by the young, the Government will allow money held in tax-free Child Trust Funds to be rolled over into ISAs on maturity.

Find out more about ISAs | Pre-Budget Report: Five Key Changes