Money Q&A: How do I enter the ISA jungle?

We are both looking to top up our pensions. We've recently opened a cash mini ISA. We are now wondering about a saving a regular amount of about pounds 100 a month in an equity ISA. We have no knowledge of the stock market and would not want to risk losing everything, though we understand that over 10 years the risk is very low. But there are so many equity ISAs available we'd be grateful for any advice or guidelines with particular reference to reliability and management charges.

JM, LONDON

There is a wide consensus that the ISA rules are absurdly and confusingly complicated. For that you have to thank Gordon Brown. Write to him if you think they should be changed.

First, let's clarify the ISA rules. You talk of "we" and I assume that you are a (married?) couple. In fact couples, married or otherwise, cannot open joint ISA accounts. So you can each have an ISA, or you can have one ISA in one name. What you currently have also affects your ISA options for the rest of this tax year, which ends on April 5.

Each tax year you have a choice. You can open up to three mini ISAs each tax year - one for cash, one for life insurance and one for stock market investments. This tax year, the investment limits are pounds 3,000 for cash, pounds 1,000 for life insurance and pounds 3,000 for the stock market. In subsequent tax years, the investment limit for a cash mini ISA falls to pounds 1,000.

Alternatively, you can open one maxi ISA each tax year with an investment limit of pounds 7,000 in this tax year, pounds 5,000 in subsequent tax years. This money can all be invested in the stock market, or it can be divided in the same way (cash, life insurance, stock market) and with the same limits as mini ISAs, but within the one plan.

So, for example, a husband and wife could each take out a maxi ISA this year and invest up to pounds 14,000 between them, all in the stock market.

That option is no longer open to you this tax year because you have already opened one cash mini ISA (or is it one each?). People who have opened a cash mini ISA can open two further mini ISAs. One is a life insurance mini ISA, an option that few providers offer and which has had few takers. The other is a stock market mini ISA with an investment limit of pounds 3,000. That pounds 3,000 limit is more than enough for someone who wants to invest pounds 100 a month.

However - and here's the crucial point - it is vitally important that when you find a fund to invest in, you make it clear that you want a stock market mini ISA. If you accidentally subscribe to a maxi ISA when you have a mini ISA for this tax year, you will be breaking the rules. The maxi ISA will, therefore, become invalid and lose its tax-free status.

ISA complications apart, where should you invest your money? Strictly speaking, only authorised advisers who have found out about all your circumstances are allowed to give you individual advice, and may be you should consider getting such advice. But the typical advice for the typical long-term (at least five to 10 years) investor would be to start a portfolio of investments by looking for a fund (eg, unit trust) that invests in the largest UK companies. Large established companies are generally considered to be lower risk. You may not get the best returns, but you may be less likely to lose money.

In looking for funds that invest in large UK companies you will have a choice. You can go for an actively-managed fund or an index-tracking fund. With an actively managed fund, a fund manager picks the individual companies to invest in according to their prospects of outperforming other companies' shares.

But actively-managed funds have higher charges. There is a long-running debate over whether it is worth paying these charges and whether City experts can pick winners and deliver better returns.

The alternative is the index-tracking fund. Various models are used to track an index, such as the FT-SE 100. The basic principle is the same for all. A computer program decides which shares to invest in based on their weighting within the index. No consideration is given to whether an individual company's shares look a good prospect. The idea is to mirror the movements in an index. On past performance, the long-term trend of most stock market indices is up. They have attracted huge amounts of money and they are often recommended as the ideal starting point for novice investors.

For more information, and for pointers to find the most suitable funds for you, ring the unit trust information service on 0181-207 1361. It is run by the industry's trade body and provides a range of pamphlets on investment. You might also find the statistics pages of Money Management magazine useful.

Write to the personal finance editor, Independent on Sunday, 1 Canada Square, London E14 5DL, and include a phone number; or fax 0171- 293 2096; or email c.francis@independent.co.uk. Do not enclose SAEs or any documents you wish to be returned. We cannot give personal replies, nor can we guarantee to answer letters. We accept no legal responsibilities for advice given.

PROMOTED VIDEO
News
ebooksNow available in paperback
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

Reach Volunteering: Trustee – PR& Marketing, Social Care, Commercial skills

Voluntary Only - Expenses Reimbursed: Reach Volunteering: Age Concern Slough a...

Reach Volunteering: Charity Treasurer

Voluntary Only - Expenses Reimbursed: Reach Volunteering: Crossroads Care is s...

SThree: Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £35,000: SThree: We consistently strive to be ...

Ampersand Consulting LLP: Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible