ISAS: All for one and one for all

Fresh start or false start? Here and on pages 8 and 9 we examine the pros and cons of the new individual savings accounts

We are almost three weeks into the new age of the individual savings account. Before the launch, providers faced the prospect of a dark dawn. Abbey National's survey on people's understanding of the term "maxi-ISA" indicated that 20 per cent of those questioned thought it was an energy drink and 7 per cent a new make of car. Only 37 per cent recognised it as a tax-free savings account.

Given the level of confusion that apparently continues to grip the public, ISA providers are taking an upbeat line on their results so far - Abbey National reports 80,000 plans sold on the first day and a steady 5,000 a day since then, while Halifax took pounds 250,000 in ISA subscriptions in the first week.

Yet the press remains pessimistic about the ISA's reception, largely on account of its convoluted rules.

The Government's rationale for doing away with PEPs (which provided tax- free shelters for stock market holdings) and Tessas (which did the same for deposit accounts) was simple. It wanted to make tax relief more easily accessible to less sophisticated savers and encourage everyone to develop the savings habit.

Moreover, there is greater flexibility within each ISA investment category. Investors in unit trusts are no longer limited to funds focusing mainly on the European Union, as was the case with PEPs; while for cash deposits the fixed five-year term, which restricted savers' access to their tax- free Tessa cash, has also been removed.

That's good. So what is not so good? First, the fact that the total amount you can tuck away in an ISA will be only pounds 5,000 after this initial year (we've been granted an extra pounds 2,000 for the 1999/2000 tax year). By contrast, assiduous investors could put over pounds 10,000 per year into PEPs and Tessas.

The reasoning behind the reduction is straightforward: if more of us are going to take advantage of a limited chunk of tax relief from the Government's coffers then we each have to make do with a smaller portion.

Worse is the complexity of the rules (outlined in the box below). They are perplexing enough for people with some experience of investing in PEPs and Tessas, but run the risk, ironically, of deterring investment innocents altogether.

The bottom line is that instead of two quite separate tax-free products - one for people more comfortable with cash deposits and the other for those keen to invest in equities - we now have a single structure to cover both, as well as insurance-linked investments.

They are catered for by splitting the ISA into different sub-sections: investors can choose a single maxi plan with just one plan manager, or up to three separate mini plans with different managers. The result is a maze of choices and possible pitfalls.

There's an added complication for the weary would-be investor in the shape of the CAT standards or markings. These are guidelines introduced by the Treasury as a benchmark for the investment industry to try and ensure that investors benefit from low costs (C), easy access to their money (A) and fair terms and conditions (T).

Greater consumer information is a laudable goal, which should, in theory, make investors more confident about taking the plunge. But the CAT system has attracted much criticism from the industry.

First, a CAT marking says absolutely nothing either about the past/current performance of the product or about its suitability for any particular investor - it's simply an indication that you won't be unexpectedly ripped off. But there's a fear that investors could mistakenly view a CAT-standard ISA as a government endorsement of the quality of that investment.

On top of that, many fund houses claim that the CAT requirements are unworkable for actively managed funds. If they are employing the best (that is, the most expensive) analysts and managers, they say, they simply cannot lower their charges to the CAT standard 1 per cent annual maximum.

The consequence is that most CAT unit trust ISAs are index- tracking funds, which are cheap to run because there's little managerial input.

However, several actively managed funds are CAT-marked - including Norwich Union, Fidelity and Standard Life - which suggests that other fund managers are reluctant to give up their comfortable profits. Investors, for their part, need to be confident that non-CAT ISAs will compensate for higher costs with better performance.

There's no need to commit yourself to any product at this stage. It makes sense to watch the ISA act unfold, familiarise yourself with its complexities and keep an eye on new arrivals into the market.

ISAS - THE RULES

You can choose to hold your investment in a single plan (maxi ISA) or up to three small separate plans (mini ISAs). But you cannot choose both in one year, so if you open one mini ISA, you are committed to minis only for that year.

MAXI ISA - one provider only.

In 1999/2000 you can hold up to pounds 3,000 in deposit accounts, up to pounds 1,000 in life insurance and the balance, up to a total of pounds 7,000, in unit and investment trusts, stocks and shares, bonds and gilts. If you wish, you can hold the whole pounds 7,000 in stocks and shares. In future, the cash element will be reduced to a maximum of pounds 1,000 and the total holding (which can be all shares) to pounds 5,000.

MINI ISA - up to three plans from separate providers.

In 1999/2000 you can have one plan with up to pounds 3,000 in deposit accounts; one with up to pounds 1,000 in life insurance; and one with up to pounds 3,000 in stocks and shares. In future years, the cash element will be reduced to a maximum of pounds 1,000 and the total holding to a maximum of pounds 5,,000.

Mini ISAs let you choose specialist managers for each part of your investment. But you can only put pounds 3,000 into stocks and shares even if you don't use all the other elements.

A Maxi ISA lets you put as much as you want into stocks and shares. But you sacrifice the opportunity to mix and match providers.

Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voices

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
The last great picture - Winner 'Black and White' and overall 'Wildlife Photographer of the Year'
art
News
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee
people

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
tech

Board creates magnetic field to achieve lift

News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London