How to tell your MINIs from your MAXIs

ProShare, the organisation which encourages share ownership, guides you through the ISA maze

The ISA is a tax-free savings account designed to make investing for the future a much easier and attainable option for everyone. ISAs allow you to save in cash, life insurance and stocks and shares, and are available to any UK resident over the age of 18.

The ISA is a tax-free savings account designed to make investing for the future a much easier and attainable option for everyone. ISAs allow you to save in cash, life insurance and stocks and shares, and are available to any UK resident over the age of 18.

The maxi and mini ISA There are two types of ISA; the maxi and mini. You are only allowed to open one maxi ISA, or up to three mini ISAs in one tax year.

The maxi ISA allows you to invest in cash, stocks and shares and life insurance under one account, with one ISA manager looking after your savings. You can invest up to £7,000 in a maxi. This can be up to £3,000 in cash, up to £1,000 in insurance, and up to £5,000 in stocks and shares. Should you decide not to invest in cash or insurance you can invest the £7,000 in stocks and shares.

The mini ISA consists of one each for cash, stocks and shares, and life insurance. The Inland Revenue suggests this may benefit those who want a separate fund manager for each element of their savings, although it will be possible to hold all types of mini ISA with the same manager. This year you can invest up to £3,000 in a cash mini ISA, £1,000 in an insurance mini ISA and £3,000 in a stocks and shares mini ISA.

Yearly investment levels of ISAs.

THE MAXI Cash: up to £1,000

Insurance: up to £1,000

Stocks: up to £5,000

Maximum Investment: £7000

THE MINIs Cash: up to £1,000

Life Insurance: up to £1,000

Stocks: up to £3,000

Maximum Investment: £5000

Cash can include savings accounts and National Savings products. Stocks and shares can include unit trusts, investment trusts, OEICS, corporate bonds, and UK government gilts with at least five years to maturity. Not all life insurance policies can be included within you ISA. Your ISA manager may be able to provide you with a range of policies, or a list of acceptable policies from different issuers.

Tax benefits All interest, dividends and bonuses from cash, and stocks and shares held in an ISA are exempt from income tax, and none of your savings needs to be reported on your tax returns. Capital gains on ISA investments are also exempt from Capital Gains Tax, though any losses from ISA investments cannot be allowed for CGT purposes against capital gains elsewhere. Dividend payments on shares in UK-based companies will carry a 10 per cent tax credit, and this will be refunded through your ISA account manager. However, this 10 per cent tax credit is to be abolished in April 2004.

How should I choose an ISA? There are a vast array of ISAs available from high street banks and building societies, fund managers and other investment organisations. When opening an ISA think carefully about the following points:

â¿¢ Make sure you are aware of the terms and conditions and fees you may incur. This may include general management fees, transaction charges or withdrawal fees.

â¿¢ Decide how much you want to save. This might be monthly instalments, or a one-off payment.

â¿¢ Consider how quickly you might want access to your savings. Some ISAs will pay better rates of interest if you agree to a specific notice period before withdrawing from the account. This might be from a few days to several months so it is best to consider this carefully before tying up your money.

â¿¢ Consider what level of risk you want, particularly over stocks and shares and unit-linked life policies.

â¿¢ Decide which ISA suits your needs and shop around for the best deal. Remember to consider the whole tax year - are you likely to receive a lump sum later in the year perhaps from a maturing employee share scheme? If so, take care over opening a cash ISA since this would limit the amount of shares you can hold in an ISA to just £3,000.

CAT Standards Some ISAs conform to CAT standards, standing for fair Charges, easy Access and decent Terms. These are to help new investors decide which ISA provider to use. Their use is purely voluntary but they indicate a variety of "user friendly" features incorporating minimum charges for transactions and investment management, and easy and quick access to savings. However, CAT Standards should not be regarded as an indication of good investment prospects, they only relate to the conditions attached to the ISA.

Employee Share Ownership Should you be receiving shares from either a share save or profit-sharing scheme you can transfer these directly into the stocks and shares component of your ISA within a period of 90 days from the date they emerge from the scheme.

PEPs and TESSAs

PEPs and TESSAs have been replaced by ISAs. But, you do not have to sell your PEPs, or transfer TESSA investments into an ISA. From 6 April 1999 you could no longer contribute to your PEP investments though you can still pay into your TESSA up to the annual limit. Their tax breaks will remain the same, and you can still transfer between TESSA and PEP providers/managers. There is a TESSA-only ISA in which you can transfer your TESSA investments on maturity (restricted to capital invested) up to £9,000, without affecting your yearly ISA investment level.