Investing in the Stock Market: Are you the Mini or the Maxi type?

If you're prepared to take some risk, the returns can be excellent. Here, and on pages 12 and 13, we explain how it can be done
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An ISA that invests in stocks and shares is pretty much a PEP by a new name. Like a PEP a stock market ISA acts as tax-free wrapper on your investment - the dividends and interest paid to you are tax free and any growth on your capital is free of capital gains tax (CGT). But the tax-free attraction of both ISAs and any PEPs carried over after 5 April has been reduced. While growth is still tax free, your dividends are taxed at 10 per cent. Only corporate-bond PEPs and ISAs have escaped this tax.

You can invest pounds 7,000 in ISAs this year and just pounds 5,000 every year afterwards.

Stocks and shares ISAs

If you are investing for the long term and are comfortable with the fluctuations of the stock market, a stocks and shares ISA is the preferable route for tax-free savings. You are free to use any investment vehicle, be it collective investments (see left), or through direct share investment. Corporate- bond ISAs are also popular. Here you are, in effect, contributing a loan to a company that repays you back with interest.

How do stock market ISAs differ from PEPs?

Because ISAs offer more options than PEPs they are more complicated. In any one tax year, an investor can hold one Maxi ISA or up to three Mini ISAs. Maxi ISAs can contain cash and life insurance as well as stocks and shares, but all these components must be with the same provider. This tax year, in a Maxi ISA, you can hold pounds 3,000 in cash, pounds 1,000 in life insurance and, if you forgo both of these, up to pounds 7,000 in stocks and shares. From April 2000 onwards, the cash limit is reduced to pounds 1,000 and the overall shares limit to pounds 5,000.

Because you cannot take out a Maxi ISA and a Mini ISA in the same year, which one you go for is crucial - if you opt for a cash ISA with your bank, your stocks and shares allowance is immediately restricted to a pounds 3,000 in a Mini ISA. There has been speculation that the Government is looking into changing the rules to make them less confusing.

How to invest in an ISA

You can invest in a stock market ISA by lump sum or regular monthly contributions. "If you are a lump sum investor, you should be looking at the medium to long term. You should not spend too much time getting the timing right. The FT-SE keeps on rising - that seems to be the nature of the beast," says IFA Graham Bates.

He says lump sum investors are generally better off with Maxi ISAs. "For the younger investor, who hasn't got as much money I would suggest a Mini ISA, so he or she can also build up tax-free savings in a Mini cash ISA."

Where to buy an ISA

You can invest in a stocks and shares ISA direct from an advertisement, through an IFA, a sales person or through a discount broker. If you are unsure about the stock market it is perhaps best to invest with an IFA who will give you independent advice on which ISA to take out.

Francis Klonowski, an IFA, says that, given the confusion over ISA rules, you should still take advice even if you are a seasoned investor.

For any stock market investor, he says performance and not cost is the key point. If a fund has a government CAT (Cost, Access and Terms) mark it merely indicates low management charges, no initial charge and minimum contributions of pounds 50 a month.

You can also buy ISAs through a sales person. Banks, building societies and insurance companies have established sales networks that provide advice, but remember the advice you receive will only concern that company's products.

Some ISA fund managers are now selling direct or through their own sales teams. Gartmore, for example, owned by NatWest, is selling its stocks and shares ISAs via the bank's branches, as well as directly over the internet.

Tesco is the only supermarket chain to sell ISAs - it claims to have sold 500,000 since April. The index tracker and a corporate bond have no initial charges and, until next April, no annual fees. As with buying through an IFA, if you buy from a salesperson, expect to pay an initial charge, an annual management fee and a small annual fee know as a "trail" commission. If you want to cut costs, invest through a discount broker. They can negotiate large discounts with fund managers and refund part of your initial charge - they still make money because they earn a trail commission every year.

Contacts: Gartmore, 0171-782 2000; Invesco, 0171-626 3434; Jupiter, 0171-412 0703; NatWest Stockbrokers, 0171-895 5257; Newton, 0800 614330; SocGen, 0171-815 8600; TQ Direct 01902 570570.