From April 6th 2008, changes in the ISA rules simplify the scheme and make life easier for investors and savers.
The key point in the changes, announced last year, is that there is no time limit on the ISA tax exemptions.
Previously, legislation fixed a time limit, but this has been removed so the tax exemption of the ISA is now permanent.
This means the ISA is the ideal long-term savings and investment scheme, since you can withdraw any amount of capital and income at any time free of tax. Effectively, you can now make the ISA your own permanent tax shelter.
Compare best ISAs with our best buy tables
Build up a next-egg for the future
Suppose that you put the maximum £500 per month into an ISA for the next 15 years, and that you get a 7% annual return on your money. You will then have a tax-sheltered £158,000 and even without any more contributions, after another ten years that would grow to £317,000, capable of providing a tax-free income for life of about £12,000 while leaving the capital intact. And the ISA has no restrictions on how long you must invest for or how much or when you take money out.
You don’t even have to provide any details about your ISAs on your tax return.
Simpler new rules
Other changes to ISAs take effect from April 6th 2008:
• The distinction between Mini- and Maxi- ISAs is removed. Instead there are two forms of ISA, the Cash ISA and the Stocks & Shares ISA.
• The annual investment limit for the Cash ISA rises to £3,600 and for the Stocks & Shares ISA to £7,200.
• You may move money you have accumulated in a Cash ISA to a Stocks & Shares ISA without affecting your annual investment limit. But you cannot switch from a Stocks & Shares to a Cash ISA.
• When Child Trust Funds mature, it will be possible to put the proceeds into an ISA and maintain tax-exempt status.
• The rules for Personal Equity Plans and ISAs are being brought into line. This means that PEP and ISA accounts can be merged, and if you hold both forms of account with one provider they will probably merge them sometime in 2008.
Many providers will be promoting consolidation of PEP and ISA accounts in coming months. Consolidation can make a lot of sense for both forms of ISA. But do not be in a hurry to consolidate Cash ISAs- I am expecting the launch of more favourable schemes offering better ‘tiered’ interest rates on larger sums in the next few months.
Merging Stocks & Shares PEPs and ISAs in one account certainly makes sense. Use one of our Best Buy low-cost self-select ISAs and avoid high-cost plans from the banks.
Which of them is best will depend on what investment you want to buy. For investment trusts, the F&C plan is good; for shares, Selftrade; for funds, FundsNetwork or Hargreaves Lansdown.
As I’ve pointed out before, for basic rate taxpayers the tax breaks on putting money into a personal pension amount to only 6% of the amount invested or saved. Of course it makes sense to join and pay into a pension scheme where your employer makes contributions, but for other savings, the ISA is a better way to save and invest for retirement as well as for other long-term aims.
