UK: ISAs Get Nicer

Last Updated: 12 April 2007

With ISAs set to become permanent and less complicated, we examine the proposed changes and why it’s great news for investors.

As at April 2006, there was £111bn invested in Cash ISAs and £70bn invested in Stocks and Shares ISAs.

The government is keen to encourage further saving and, in his pre-Budget report in December, the Chancellor announced that Individual Savings Accounts (ISAs) will become permanent.

These changes were confirmed in the March 2007 Budget when further rule modifications were announced. These will take effect as of 6 April 2008.

This is good news, as ISAs were originally planned to cease in 2010. The proposed changes are also designed to make ISAs less complicated, which is again good news. We’ll take a look at each of these new proposals and see how they’re going to be achieved.

New investment limits, with no distinctions
Mini and Maxi ISAs will cease and be replaced by the more appropriately named ‘Cash’ and ‘Stocks and Shares’ ISAs. Investors will be able to invest in one or both of these ISA components each year, with either a different or the same provider. A limit of £3,600 will be placed on the Cash component whilst any remaining amount (up to the new £7,200 annual limit) can be invested into the Stocks and Shares component.

For example, an individual could invest £1,500 into a Cash ISA with one provider and £5,700 into a Stocks and Shares ISA with either the same or another provider.

PEPs come within the ISA wrapper
Personal Equity Plans (PEPs) were replaced by ISAs in 1999 but many investors still have considerable funds invested in them. The new reforms will simplify things, bringing the more restrictive PEP investment rules into line with the ISA rules. At the same time, the PEP name will cease to exist as the investments will automatically become Stocks and Shares ISAs.

Again, it’s good news, as the reform will simplify administration for investors and providers. And, whilst providers will not be required to amalgamate their clients’ accounts, it is clearly an option for them.

Transfers from Cash ISAs to Stocks and Shares
Individuals who have funds invested in Cash ISAs will be able to transfer some or all of these funds into Stocks and Shares without affecting the ISA status of the funds or their annual investment limit. This will allow much greater investment flexibility and may be useful as people’s circumstances change.

Child Trust Funds roll over into ISAs
The first of the Child Trust Fund accounts will mature in 2020 and these funds will be allowed to roll over into ISAs. This measure aims to encourage young adults to continue to save.

Consolidation of PEPs and ISAs
There are many individuals who have substantial funds invested in PEPs and ISAs across a large number of different providers. As a consequence, they are difficult to manage effectively as it is hard to create a sensible asset allocation. This has, in some cases, created a barrier to any meaningful annual review of portfolios. However, it will now be possible to consolidate the PEP and ISA holdings with a single provider, keeping holdings in their tax-advantaged wrappers, simplifying the administration and allowing a unified investment strategy to be applied to the holdings.

If better investment options are available, it will be possible to sell the holdings within a Stocks and Shares PEP or ISA and then transfer the funds, in cash, to another provider. Alternatively, most underlying funds can be re-registered with another provider to facilitate flexibility. The decision to transfer will be triggered by a desire to see the PEP and ISA investments managed more effectively and it is important to choose the new home for them with care.

Two investment options
There are two main types of investment options available: the share portfolio and the unit trusts and open-ended investment company (OEIC) portfolio.

Share portfolio
An investment manager manages a portfolio of directly invested shares, all held within PEP and ISA wrappers. This is an attractive route for individuals who already have a portfolio managed in this way, or for those who have substantial PEP and ISA holdings, as both can be managed as a single holding by the same investment manager, with the advantage of continuous review.

Unit trusts and OEIC portfolio
There are approximately 2,000 UK funds, most of which have their own risk profile and specialise in a particular asset class and/or geographical location.

Internet-based fund platforms can access a huge range of these unit trusts, all within a single PEP or ISA account. Most advisory firms will offer advice on the initial selection of funds and will then monitor and review their performance.

New certainties, simpler management
The new ISA reforms will create investment assurance and allow greater freedom. We know that ISAs will continue, and that they will be simpler to administer – and it’s a welcome development for the investment industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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