There are a number of changes to the ISA rules which the Treasury has confirmed will take effect from 6th April 2008. Here we summarise the main changes, as follows:

• The overall annual investment limit is increased to £7,200 (up to £3,600 in cash and the balance in stocks and shares or the full amount in stocks and shares);

• Existing PEP and TESSA only ISA (TOISA) accounts will be re-designated as stocks and shares and cash ISAs respectively;

• The distinction between mini and maxi ISAs will be abolished, with all accounts being re-designated as ‘cash accounts’ and ‘stocks and shares accounts’;

• Transfers from the cash component of existing ISAs will be permitted into stocks and shares accounts and will not count against the current year’s subscription;

• Money held in Child Trust Fund (CTF) accounts will be able to roll over into an ISA once the child reaches the age of 18.

Opportunities

These changes represent an opportunity for consolidation service across PEP and ISA holdings. There are an estimated 3.5m PEP holders with around £38bn of investments held across a myriad of sectors. Charges across one simplified ISA wrapper should be lower, delivering real benefit for investors. The changes also facilitate a diversification of assets within the ISA wrapper by transferring some or all cash saved in previous years into equity based funds.

• Bringing PEPs into the ISA wrapper

From 6th April PEPs will cease to exist and will be treated as a stocks and shares ISA. Clients who hold existing PEPs will be able to transfer into an existing or new stocks and shares ISA . In addition there should be scope to reduce the ongoing management charges and the paperwork.

• Removing the Mini/Maxi ISA terminology

This will simplify the understanding of ISAs with clients and help generate sales. Combined with the new increased limit of £7,200 – another talking point with clients at this time of the year.

• Cash ISAs into stocks and shares

HM Treasury still want to encourage wider share ownership and therefore from 6th April 2008 it will be possible to transfer cash ISAs into a stocks and shares ISA without it affecting your 2008/09 tax year allowance.

Clients who have taken advantage of the maximum subscriptions into cash ISAs over the years (particularly where both spouses have done so) may find that they have a disproportionate amount in cash and subsequently can ‘re-balance’ their holdings without the loss of the tax wrapper.

Conclusion

Looking back, since their launch in 1999 ISAs have been a great success with over 16m* people saving in excess of £180bn, with £50bn of that total being in fund based ISAs (* Source – Individual Savings Accounts: proposed reforms HM Treasury December 2006).

ISAs were designed specifically to reach a wider section of the population and are now seen as the Government’s primary vehicle, outside pensions, to encourage adults to save more. Of course, the big selling point with ISAs is the tax advantages, as gains are tax-free and there is no further tax to pay on income.

HISTORY

Individual Savings Accounts (ISAs) were introduced by the Government to replace PEPs and TESSAs. The idea was to encourage more people to save by extending tax benefits to cash investments and life assurance contributions as well as to equity and fixed interest investments. ISAs present tax free access to investment in a wide range of financial instruments and markets. Funds available present choices to match most investor's attitudes ranging from cautious to more risk oriented.

ISAs present tax free access to investment in a wide range of financial instruments and markets. Funds available present choice to match most investor's attitudes ranging from cautious to more risk oriented.

Both lump sum and regular contribution contracts are available.

One further advantage to ISAs is that they do not have to be declared on Income Tax forms.

The tax advantages of the ISA should enhance your overall investment returns. When you come to sell your holding, your entire investment (no matter how large) will be shielded from Capital Gains Tax (CGT). In addition, you will receive a "tax credit" for 10% of tax paid on equity dividends (until April 2004) and 20% on income payments from bond funds. If you are a high rate tax payer you will benefit from having no further income tax liability, which should make a big difference to your savings.