Many people are coming to realise that to accumulate a capital sum to meet a future need or simply have a nest egg they need to take action and save regularly. The good news is that for those who want to provide for themselves and their families there are a range of flexible options to suit everyone. We will help you identify your savings goals and advise you which options from the whole market place will the most appropriate for your needs.
ISA’s
There are three basic types of ISA: Maxi, Mini and TESSA-Only. The two types of investment that may be contained currently within a Maxi or Mini-ISA are:
Cash;
Stocks and Shares (which includes unit trusts, OEICs, investment trusts etc.)
A Mini ISA may be offered as a ‘wrapper’ for any one of the two types of investment, but may not contain more than one type. A client wishing to invest in each of the two therefore, and wanting to use different providers for each, would need to separately effect a Cash Mini-ISA and a Stocks & Shares Mini-ISA.
Maxi ISAs on the other hand may contain both types of investment within the one wrapper, but do not have to offer cash options. Many Maxi ISAs offer investment only in stocks and shares.
An investor may effect either in one Maxi ISA or up to two separate Mini ISAs in any tax year. Maxi and Mini ISA options may not be mixed however, so it is not possible, say, to invest £3000 in a stocks and shares Maxi ISA whilst effecting a £1000 cash Mini ISA with another provider, even if the Maxi ISA provider does not offer a cash deposit option.
The £7000 annual ISA limit for 2006/2007 allows up to £4000 to be invested in stocks and shares and £3000 in cash. Alternatively using the Maxi-ISA route £7000 may be invested in stocks and shares. Investors wishing to maximise their investment in stocks and shares through an ISA should always choose a Maxi-ISA.
TESSA-Only ISAs offer investors the opportunity to reinvest the capital element from the proceeds of a maturing TESSA Account (but not the accrued interest) into a new tax-free environment. The ‘rollover’ must be effected within six months of the vesting date of the original TESSA. Rolling over TESSA contributions into a TESSA-Only ISA will not affect the investor’s normal ISA entitlement for the year in question and need not be effected with the same manager as the Maxi or Mini-ISAs chosen by the investor for their normal year’s contribution.
Funds cannot be switched directly from PEPs to ISAs and there would in any case be little point in such a transaction, the tax treatment of PEPs and ISAs being largely identical.
Investors have no personal liability to income tax or capital gains tax on income or gains arising from investments held within an ISA. Equally, capital losses cannot be used to offset capital gains realised elsewhere. No details of ISA investments, income received or gains realised need be included on your annual tax return.
ISAs may not be written on a joint basis or in trust.
The Government has introduced a so-called ‘CAT Standard’ for ISAs, ‘CAT’ standing for Cost, Access and Terms. The meaning of this for the type of ISA I have recommended is explained below.
To qualify for a CAT Standard a Stocks & Shares ISA may make an annual charge of no more than 1% but may make no other charges. The minimum contribution may be no greater than £500 as a lump sum or £50 per month. The investment must be single priced and be an authorised unit trust, OEIC or investment trust with at least 50% invested in EU securities.
Unit Trusts / Open-Ended Investment Companies (OEICs) / Investment Companies with Variable Capital (ICVC)
A Unit Trust / OEIC / ICVC is a collective investment vehicle. The main benefits for investors are that:
Professional investment research and management is made affordable for even the smallest investor;
Risk is spread over dozens or even hundreds of different holdings within the fund, each investor effectively owning a small proportion of each;
Economies of scale cut dealing costs when holdings are bought and sold;
These funds can invest across a broad range of asset classes and investment markets
Endowments
An Endowment Assurance provides a level of life cover (chosen at outset) for a fixed term. Premiums are designed to cover the cost of this cover together with an investment element used to provide a capital lump sum at maturity. Investment can be made into a With Profits or into a Unit-linked environment. The ultimate maturity value is not guaranteed and depends upon the returns achieved by the underlying funds selected.
Friendly Societies
Friendly Society tax-exempt funds grow free of all taxes. This means that, all things being equal, your money should grow faster than it would in a fund with no such tax advantages. The final maturity proceeds can also be taken tax-free.
Due to these advantages the government restricts the amount that any one individual can invest.
Maximum Investment Plans
A Maximum Investment Plan is a life assurance-based investment contract. For higher rate taxpayers these plans can be very tax efficient. The funds in which the plan invests are subject to tax on their income and capital gains at a rate roughly equal to basic rate income tax. At maturity the proceeds can be taken tax free, which means that you effectively avoid any charge to higher rate tax.
Surrender values in the early years are likely to be low. Furthermore, if you encash the plan before maturity you may be liable to higher rate tax on the excess of the surrender value over the sum of premiums paid. You should also be aware that the value of units can fall as well as rise.
The plan offers links to a wide choice of funds investing in equity, property and fixed interest securities. Switches can be made between these internal insurance company funds at a reasonable cost if desired.
