Investing For Growth: Maxi or Mini? Get to know the ISA

AFTER 6 April, individual savings accounts will be the only tax-free savings vehicle on offer. ISAs can have three investment components: cash, stocks and shares, and life insurance. Investors seeking capital growth will be cheered to hear that they can continue making equity investments in an ISA. Moreover, qualifying funds don't have to have at least half their assets invested in the European Union.

The bad news is the ISA investment limits. With the exception of the 1999/2000 tax year, you can invest a maximum of pounds 5,000 in an ISA, split between up to pounds 1,000 in cash, up to pounds 1,000 in life insurance and up to pounds 5,000 in stocks and shares each tax year subject to the overall pounds 5,000 limit. For 1999/2000, the limits for cash and equities are a maximum of pounds 3,000 and pounds 7,000 respectively.

The annual limit for insurance investments is the same in 1999/2000 as it will be in future years. Any policy that insures the life of the policyholder is eligible for inclusion in an ISA. Joint life and multiple life policies are not eligible and the investment can't be used for mortgage security.

Maxis and Minis

ISAs have two separate structures, Maxis and Minis. In any tax year investors can hold either one Maxi or up to three Mini plans. A Maxi ISA must be managed by a single plan manager and must offer a stocks and shares component, with or without the cash and life insurance elements.

A Mini ISA can hold just one of the three types of investment and you can choose to have up to three separate plans provided by up to three managers.

Once made, investments count for the full tax year, even if withdrawals are made. For example, if you start a Maxi ISA and invest pounds 3,000 in cash and pounds 4,000 in equities (in tax year 1999/2000) and then withdraw pounds 2,000 of the cash, this doesn't mean that you can invest a further pounds 2,000 in equities.

Similarly, if you decide to hedge your bets and start a cash Mini ISA, you will then be restricted to an equity Mini ISA in that tax year, with an investment limit of just pounds 3,000.

A word of warning: choosing a Maxi ISA will restrict you to a single plan manager, and providers of top-performing funds may not offer the best interest rates on your cash and insurance deposits. Similarly, banks and building societies paying good rates of interest may not be able to match the performance of the top-ranked investment funds.

Kathleen Hennessy is assistant editor of 'Moneywise' magazine.

isa guides

If you sent off for a guide some time ago, make sure it's up to date; the Woolwich guide originally issued in November 1998 was published before the rules were finalised and contains a fundamental error about which types of equity investment are permitted in an ISA.

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