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Guide to ISAs - What is an ISA?

It is an Individual Savings Account. ISAs were launched to UK residents by the Government in 1999. They help protect your savings and investments from the taxman. You can save up to £7,000 in each tax year and make cash deposits, invest in stocks and shares, or both.

A tax year runs from April 6th one year to April 5th of the following year. There are two types of ISA: the mini and the maxi. In one tax year you can put your money into;

• two mini ISAs (up to £3,000 in a cash ISA and up to £4,000 in a stocks and shares ISA)

OR

• into one maxi ISA (up to £7,000 made up of shares and up to £3,000 of cash).

What tax advantages do ISAs have?

You will not have to pay any Income Tax or Capital Gains Tax on any of the returns you make from your ISA.

You do not pay any further tax on income or capital gains. The income generated within the underlying funds has already been subject to tax as either a dividend distribution or interest distribution. For funds within an ISA, the plan manager will reclaim the tax paid on interest distributions but can no longer claim this for dividend distributions.

Will I be able to take money out of my ISA?

Yes. You can make withdrawals at any time without losing any of the tax advantages. However, we recommend that you leave your investment untouched for a reasonable length of time, as an ISA that invests in the stock market should be regarded as a medium to long-term investment (more than five years).

You should also remember that once you have invested the maximum amount in any tax year, you cannot invest any more, regardless of how much you've withdrawn during that tax year.

What are the CAT standards?

CAT stands for: C - reasonable Charges; A - easy Access; T - reasonable Terms. This is the minimum standard the Government set for ISAs, although ISA managers are not obliged to offer an ISA that meets this standard.

The government announced that from 6 April 2005, the existing voluntary CAT standards would be discontinued for the marketing and sale of ISA products. Existing CAT standard ISA holders will continue to remain on the same terms and conditions after 6 April 2005 without any changes being made to their ISA account.

See Stakeholder ISA's below.

Who can open an ISA account?

To open an ISA you must be 18 years old or over. However, those over aged 16 and over are entitled to open a Mini Cash ISA or the cash component of a Maxi ISA. Individuals must be UK residents for tax purposes. Spouses and Civil Partners of individuals working abroad are also entitled to open an ISA.

ISA Cash Component

This component allows individuals to invest in Building Society deposits, UK and European authorised Bank deposits, cash unit trusts or National Savings. This is a good choice for short-term savings especially if individuals want to access their money easily. The cash component allows individuals as young as 16 years to open either Mini Cash ISAs or the cash component of a Maxi ISA.

With Cash ISAs investors will benefit from a minimum return amounting to the sum invested over the term plus interest.

ISA Stocks & Shares Component

This component allows individuals to invest in collective shares, for example, Unit Trusts, Investment Unit Trusts, shares listed on a recognised stock exchange, bonds and gilts and Life Assurance. This type of ISA is good if individuals are able to leave their money alone for a long period of time, usually over five years, and are comfortable taking on the risk of market fluctuations in the value of their investment.

With these types of accounts there is no guarantee that the return at the end of the term will exceed the amount invested.

Stakeholder ISAs

New stakeholder products have now become available. To earn the name 'stakeholder' the products have to meet conditions designed to ensure that the products are straightforward and good value.

There are five stakeholder products:

• Stakeholder deposit;

• Stakeholder medium-term investment product (MTIP);

• Smoothed MTIP;

• Stakeholder pension;

• Child trust fund stakeholder account.

Stakeholder deposit, MTIP and smoothed MTIP are available in both ISA and non-ISA versions.

Stakeholder ISAs have now replaced CAT-standard ISA's, as from 6 April 2005. However, if you took out a CAT-standard ISA before that date, it will continue to meet the CAT standards. ('CAT' stands for fair Charges, easy Access and decent Terms)

Neither the stakeholder conditions nor the CAT standards guarantee the performance of the product. They do not mean that the government recommends that product or that the product is necessarily suitable for you. But they do provide a useful benchmark against which to compare other products.

The stakeholder conditions are as follows:

Cash ISAs: Stakeholder deposit account

• There are no charges to pay on stakeholder cash ISAs.

• The minimum deposit cannot be higher than £10.

• You can pay into the account in any of the following ways: cash, cheque, direct debit, standing order, BACS.

• You can make unlimited withdrawals.

• Withdrawals should be paid to you within seven days or less.

• The interest rate paid must be no less than 1% below the Bank of England base rate.

• If the Bank of England rate increases, the minimum interest rate must also increase within one month.

Stocks and shares ISAs: Stakeholder medium-term investment products (MTIP)

• Annual charge limited to 1.5% of the fund during the first ten years and 1% thereafter.

• The minimum deposit cannot be higher than £20.

• No more than 60% of the fund is invested in riskier assets such as shares.

• You can pay into the account in any of the following ways: cheque, direct debit, standing order, BACS.

• The prices at which units or shares in the fund are bought and sold must be the same, and the price should be published daily.

Extra terms apply to the smoothed MTIP:

• Some of the return in good years is paid into a 'smoothing account' to be used to top up the return in bad years.

• If the smoothing account needs extra capital, policyholders can be charged extra.

• Managers must make available information about their policies on smoothing and charging.

• The whole with-profits fund and the whole smoothing account, apart from specific deductions allowed by law, are for the benefit of policyholders.

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