ISA Q & A
Set out as a series of questions and answers we highlight some of the basics of ISA investing.
- What investments can I hold in an ISA?
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ISAs are essentially tax-free wrappers for other investments - so it's not right to say "I've invested in an ISA", but rather that you have invested in a share or unit trust or other asset which you then keep within an ISA.
You can hold stocks and shares, cash and life assurance policies in an ISA in one of two ways. Both give you a £7,000 annual subscription limit.
With a Maxi ISA, you hold all your investments with one provider and can hold all £7,000 in stocks and shares minus up to £3,000 in cash and/or £1,000 in insurance policies.
With a Mini ISA, you can hold the various elements with up to three different plan managers. A Mini ISA allows you to hold up to £3,000 in shares, £3,000 in cash and £1,000 in insurance.
The stocks and shares element allows you to hold any authorised unit or investment trust or open-ended investment company (OEIC) or any share quoted on an exchange recognised by the inland revenue (pretty much any that you are going to want to invest in but importantly it does not include the AIM market or OEFX).
There are no geographic limitations, so you could, for example, invest all your allowance in a fund invested in Japanese shares. The government's quality assurance 'CAT' standard insists on at least 50% of investments being in the UK or Europe but this does not stop you holding more further flung investments if you choose.
You can also hold gilts, corporate bonds and loan stocks aslong as they have at least five years to go to maturity (don't ask why) and permanent interest bearing shares (PIBS). Stocks you cannot own include: AIM stocks, OFEX stocks, Residual shares (except PIBS), Irish exploration stocks, Irish developing companies and Warrants.
Deposits can be in a bank or building society or money market unit trust. Some National Insurance products are included as well as a number of bonds and accounts on which tax is normally payable.
Incidentally, if you have a maturing Tessa (Tax Exempt Special Savings Account) you can invest the original capital (but not the interest) in a Tessa-only ISA. This means that in one year you can invest up £9,000 in addition to your usual ISA allowance - £16,000 tax-free.
Finally, the life assurance element allows you to invest in with profits bonds or unit linked life insurance funds.
- How much can I invest in an ISA?
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The amount you can invest into an ISA depends on what type of ISA you choose. Up to £7,000 can be invested into a Maxi ISA each year or £3,000 into a Mini ISA.
- What is a Maxi ISA?
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Up to £7,000 per tax year can be invested in a Maxi ISA. Maxi ISA's allow you to invest in three components, cash, stocks and shares or life assurance. You can only take out only one Maxi ISA in any tax year.
- What is a Mini ISA?
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Up to £3,000 per tax year can be invested in a Mini ISA.
Mini ISAs consist if a single component, either cash, stocks and shares or life assurance. You can take out three Mini ISAs in a tax year.
- What is a CAT Standard?
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CAT stands for (reasonable) Charges, (easy) Access and (fair) Terms. CAT standards were set by the government to highlight which ISAs offer a good deal and are investor friendly.
The presence or absence of a CAT standard does not predict whether an ISA will prove to be a good or bad investment.
- What are self select ISAs and where will I find a good deal?
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Self-select ISAs are perfect for active investors. They allow you to mix and match your own investments instead of relying on fund manager to make your decisions. The hitch is that you pay more for your flexibility, particularly compared with the bargain basement ISA deals offered on tracker funds.
- Can I transfer a personal equity plan (PEP) into a current ISA?
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No. The inland revenue says this is impossible because PEPs and ISAs are seperate schemes, despite their shared ancestry as tax-free wrappers for investments.
However, the rules for PEPs changed last year, bringing the older sheme into line with ISAs. So you have much more scope under the new rules to invest in overseas companies and consolidate any single company PEPs you may hold. You can also transfer part of a PEP, whereas before you had to transfer all of it or nothing.
