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Money: ISAs are bad for our sanity

With interest rates so low, the new tax-free ISA savings accounts at banks and building societies are going down a storm. But falling for the seductive rates - up to 6.75 per cent - could rob you of pounds 4,000 of tax-free stock market savings this year.

Here's why: as soon as you sign for a cash mini ISA, you can only save a maximum pounds 3,000 in a mini stocks and shares ISA. If you had opened a maxi ISA account, you would get a total cash and share allowance of pounds 7,000. So saving between pounds 1 and pounds 3,000 in a maxi ISA leaves the rest of the pounds 7,000 to go on the stock market. That's why anyone signing up for mini cash ISAs has potentially lost the chance to invest up to pounds 4,000.

The subject is fiendishly complicated so it's not surprising that people have been going for the simplest ISA option, a tax-free savings account offered by those helpful people at your building society.

While business at the building societies has been booming, things have been sluggish at many fund managers since the crazy end to the last- ever PEP season. The baffling ISA rules don't exactly help to attract the average first-time stock market investor.

We won't see the first official take-up figures for ISAs until the autumn, but last week we had some of the first concrete evidence of fund managers' distress.

Announcing Perpetual's first-half results, chairman Martin Arbib commented that the transition from PEPs to ISAs had "so far had an adverse impact on sales". The company announced disappointing first-half profits and Mr Arbib said business was likely to stay subdued. One of the reasons he gave was that the boom in cash ISAs had already restricted the choices for many investors. If other managers join this chorus, maybe the investment rules will be relaxed a little.

There are a few useful attempts to help customers through the maze - including the newly launched CATmark logo, which will be easily identifiable as a way to spot a good-value stock market deal. But only 11 firms have signed up to display the mark.

Those of you who are still undecided about ISA investments for this year, but know that you want to put at least some savings into the stock market, should choose one of the maxi ISAs that will allow you to mix cash with decently performing stock market funds.

Some ISA fund managers are offering fairly good rates on the cash part of their maxi ISA schemes. Top payers include Virgin (5.75 per cent), Standard Life (5.35 per cent) and Johnson Fry (5.30 per cent).

Other managers with good maxi combinations (this sounds like an order in McDonald's) include Gartmore, Legal & General and Jupiter.

If you have already signed up for a mini cash ISA, you may find you can't open a mini stocks and shares ISA with your favourite fund manager as several don't offer mini ISAs at all. So bad luck if you fancied a mini ISA at (for example) Foreign & Colonial, Equitable Life, Schroders or Templeton.

n i.berwick@independent.co.uk