With an ISA, the world is your oyster. No longer do you have to limit yourself to funds that invest over half their portfolios in the UK and the European Union if you want to maximise your allowances.
Specialist venture capital trusts, which have their own special tax advantages, are just about the only sector that cannot be included in an investment ISA. However, you will be able to invest in long-established investment trusts that buy into private companies, such as Foreign & Colonial Enterprise and Candover, just as you could with PEPs.
If you are a cautious investor, but still want the gains of the stock market, you are now allowed to invest through an ISA in investment trusts that trade in second-hand endowment with profits policies, which were disallowed for PEPs.
The biggest gainers from the change to ISAs could turn out to be investment trusts. Many of the giants such as Foreign & Colonial and the Alliance Trusts are general international funds. Because they fell foul of the rules and would not commit to having over half their funds investing in the EU, they did not qualify under PEPs, so investment in them was limited to pounds 1,500 a year.
The Association of Investment Trust Companies (AITC) is currently seeking its members' support for a pounds 27m marketing and advertising campaign for investment trusts.
"The new level playing field opened up by ISAs has been a major factor in this," says Annabel Brodie-Smith of the AITC. "We want to encourage more private investors, and the new freedom and flexibility that ISAs provide gives us our chance to show what we can offer."
Obviously, with their ability to borrow money, known as "gearing", and their freedom to buy back shares which may lead to a reduction in the average discount, investment trusts are a more sophisticated investment than unit trusts or open-ended investment companies (Oeics).
Because their prices are determined by supply and demand in the stock market, they can be more volatile. But for those prepared to take a long- term view, five years or longer, they can prove to be a rewarding investment.
But most unit trusts and Oeics will have the same charges for their ISA wrappers as they did with PEPs, many investment trust groups are planning a dual pricing scheme - one price if you buy through an Independent Financial Adviser (IFA), a lower price if you buy direct.
Because so many trusts were not fully qualifying, most did not pay any commission to IFAs, unlike unit trusts. With the latter, unless you dealt through a discount broker or a fee-charging IFA, the adviser would usually pocket 3 per cent initial commission plus 0.5 per cent for annual renewals.
"Our terms of business will basically be the same as with PEPs. The big difference is the range of funds that are available with an ISA," says Leslie Drummond of Edinburgh Fund Managers. "All our 13 trusts and 15 Oeics are available compared with nine trusts and 12 Oeics that could be PEPped. If the investor comes to us direct to buy an investment trust ISA, the cost will be a pounds 30 joining fee, or free to existing PEP investors, plus a 0.5 per cent annual management charge on top of the underlying funds charges. These are usually under 0.5 per cent for typical funds.
"If the investment is through an IFA, there will be an initial 4 per cent charge and an annual management charge of between 1 and 1.5 per cent depending on which fund is chosen."
Different pricing structures are being adopted by other management groups, but it looks like it will be more expensive to buy investment trust ISAs through a commission-based IFA. Foreign & Colonial is imposing a 5 per cent initial charge and 1.5 per cent annual management charge for IFA sales, compared with a pounds 50 joining fee and a flat pounds 60 annual administration charge for direct buyers. "Minimum investment will be pounds 100 per month for regular savers," says Jeremy Tigue of Foreign & Colonial.
At Flemings, another leading investment trust manager, the charge to direct ISA buyers will be pounds 25 per fund plus a low annual management charge, with a 1 per cent dealing charge for sales or purchases, while if sold through IFAs, the charges will be the same as for most unit trusts.
The change from PEPs to ISAs may cause problems, but the dual pricing of investment trust ISAs is likely to add to any confusion. It is too early to say whether discount brokers will be offering investment trust ISAs, but even if they are, so long as you are prepared to do your own research, it will be cheaper to buy direct. Now if only unit trust and Oeic managers would cut their charges for direct sales.