Minis offer little room for manoeuvre

Many people are taking advantage of mini-ISAs to make tax-free savings, but are disqualifying themselves from the greater benefits of maxi-accounts

Cash ISAs have proved a big hit, with the Halifax alone selling more than 800,000 of these tax-free savings accounts since their launch in April 1999. It is easy to see why they have proved so popular. Unlike the Tessas they replaced, cash ISAs do not make savers lock away their money for five years to qualify for the tax breaks on offer. The Government's CAT marks make it easy to find a cash ISA with no charges, which accepts deposits as low as £10, and which is guaranteed to keep its interest payments close to base rate.

Cash ISAs have proved a big hit, with the Halifax alone selling more than 800,000 of these tax-free savings accounts since their launch in April 1999. It is easy to see why they have proved so popular. Unlike the Tessas they replaced, cash ISAs do not make savers lock away their money for five years to qualify for the tax breaks on offer. The Government's CAT marks make it easy to find a cash ISA with no charges, which accepts deposits as low as £10, and which is guaranteed to keep its interest payments close to base rate.

For many savers, a CAT-marked cash ISA is a safe bet. You might expect the CAT mark to come only at the price of a lower interest rate, but the effect is marginal at best. Even among the highest-paying ISAs shown below, insisting on a CAT mark would shave only 0.3 per cent off the interest rate you get.

James Dalby of Leeds independent financial advisers Bates Investment Services says: "Cash ISAs tend to offer the best interest rates that are available on the market. Look for the most competitive CAT-marked ISA, and you can't go wrong."

But for other investors, who want to maximise their tax-free stockmarket investment later in the financial year, cash ISAs conceal a nasty trap. ISAs come in two varieties: mini-ISAs, which put all your money into just one of the ISA's three investment options, and maxi-ISAs, which are allowed to spread your money across more than one of the three options - shares and cash, say.

Putting even the tiniest sum into a cash mini-ISA means you have disqualified yourself from buying a maxi-ISA for the whole of that tax year. Locking yourself into the mini route cuts the maximum amount of money you can then put into a 1999/2000 stocks and shares ISA from £7,000 to just £3,000.

This is because of the Inland Revenue's determination to ensure no-one breaches the ISA's overall investment ceiling of £7,000 (falling to £5,000 from 2000/01 onwards). As soon as you open a cash mini-ISA, the Inland Revenue assumes you have used your full cash allowance of £3,000 (£1,000 from 2000/01), and your full insurance ISA allowance of £1,000. That leaves just £3,000 as the most you can put into a shares ISA.

Anyone anxious to make the most of their stockmarket ISA entitlement should put their whole allowance for the year into a shares maxi-ISA. This route lets you put a full £7,000 into shares in 1999/2000, and £5,000 a year after that.

We will not know how many people have fallen foul of the mini-ISA trap until March next year, when share investors start rushing to use up their 1999/2000 ISA allowance before it disappears. Justin Modray of independent ISA experts Chase de Vere says: "It's going to have quite a serious impact on a lot of investors, but it is hard to gauge how many people it is going to affect until we get to the end of the tax year.

"The biggest problem will be people who quite honestly don't realise what is going on and inadvertently go into a mini and a maxi ISA in the same tax year. The systems are such that it wouldn't get picked up immediately. I think the Government has to carry the can to some extent for not making people more aware of the ins and outs of ISAs."

If you do open a cash mini-ISA and decide later it was a mistake, prompt action could still save the day. The Revenue rules allow you to cancel an ISA providing you do so within 30 days of opening it, and ensure the company running the plan does all the necessary paperwork. A Revenue spokeswoman says: "Under those circumstances, you would then be able to go on and subscribe to a different ISA."

All but a tiny handful of cash mini-ISAs work on a variable interest rate. One of the few providers with a fixed-rate plan is SAGA, which sells only to the over-50s.

Jay Fry of SAGA Investment Direct says: "It is prudent to have a mixture of fixed-rate and variable-rate investments in your portfolio. For our customers, it reduces the risk of a fall in income. To have both products available - fixed and variable - is an advantage to them."

The ISA rules allow you to put a maximum of £3,000 into a cash ISA this year. The average deposit in a Halifax cash ISA so far, at between £2,500 and £2,750, is already nudging close to that ceiling. Savers can also put up to £9,000 of ex-Tessa capital into a replacement cash ISA without eating into their ISA allowance for the year.

In the three months from April to June this year - the only quarter for which Revenue figures are available - cash mini-ISAs took by far the biggest single share of any ISA option. Cash mini-ISAs accounted for £3.71bn of ISAs' £7.17bn total sales.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

    Recruitment Genius: Mortgage Administrator

    £20000 - £25000 per annum: Recruitment Genius: We are a vibrant and establishe...

    Day In a Page

    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
    Markus Persson: If being that rich is so bad, why not just give it all away?

    That's a bit rich

    The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
    Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

    Coleman on course to end half a century of hurt for Wales

    Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference
    Rugby World Cup 2015: The tournament's forgotten XV

    Forgotten XV of the rugby World Cup

    Now the squads are out, Chris Hewett picks a side of stars who missed the cut
    A groundbreaking study of 'Britain's Atlantis' long buried at the bottom of the North Sea could revolutionise how we see our prehistoric past

    Britain's Atlantis

    Scientific study beneath North Sea could revolutionise how we see the past
    The Queen has 'done and said nothing that anybody will remember,' says Starkey

    The Queen has 'done and said nothing that anybody will remember'

    David Starkey's assessment
    Oliver Sacks said his life has been 'an enormous privilege and adventure'

    'An enormous privilege and adventure'

    Oliver Sacks writing about his life
    'Gibraltar is British, and it is going to stay British forever'

    'Gibraltar is British, and it is going to stay British forever'

    The Rock's Chief Minister hits back at Spanish government's 'lies'
    Britain is still addicted to 'dirty coal'

    Britain still addicted to 'dirty' coal

    Biggest energy suppliers are more dependent on fossil fuel than a decade ago
    Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition

    Orthorexia nervosa

    How becoming obsessed with healthy eating can lead to malnutrition
    Lady Chatterley is not obscene, says TV director

    Lady Chatterley’s Lover

    Director Jed Mercurio on why DH Lawrence's novel 'is not an obscene story'
    Farmers in tropical forests are training ants to kill off bigger pests

    Set a pest to catch a pest

    Farmers in tropical forests are training ants to kill off bigger pests