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
Sunday 25 April 1999
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.
Malaysia Airlines plane crash exposes alarming flaw in airline security: over one billion flights made last year without stolen-passport check
International Women's Day 2014: The shocking statistics that show why it is still so important
Teacher shows sex tape featuring herself to pupils during class by mistake
Swarm of killer bees sting woman 1,000 times
Dead woman's body lay decomposing in garage for six years before she was found
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
If you're horrified by a flame-roasted dog, you should be shocked at a hog roast
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
Exclusive: Impact of immigrants on British workers ‘negligible’
Vince Cable: Teachers 'know absolutely nothing' about the world of work
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
- 1 International Women's Day 2014: The shocking statistics that show why it is still so important
- 2 Australian man Rod Sommerville reacts to bite from deadly snake by reaching for cold beer
- 3 Teacher shows sex tape featuring herself to pupils during class by mistake
- 4 Singapore sting: Sky-high prices are pushing locals to the edge of affordability
- 5 Swarm of killer bees sting woman 1,000 times
iJobs Money & Business
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£55000 - £70000 per annum + benefits: Pro-Recruitment Group: In-House Corporat...
£80000 - £100000 per annum + benefits: Pro-Recruitment Group: In-House Opportu...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...