Personal Finance: You've heard of ISAs, but do you understand them?

THE GOVERNMENT'S new tax-free Individual Savings Account (ISA) is so confusing that barely 22 per cent of potential savers understand some of their rules, a new survey reveals.

Only 22 per cent understand that it is not possible to hold a Mini and Maxi ISA at the same time, while just 28 per cent know the correct investment limits for both or either. One month after the introduction of ISAs, the survey, by Fidelity Investments, shows that while half of all adults in the UK have heard of the new product, they remain confused in these two key areas.

Ann Davis, executive director at Fidelity, says: "It is encouraging to see the relatively high level of ISA awareness, but as with everything new, savers now need to get to grips with the nuts and bolts."

She cites the fact that the most popular ISA option is a mixture of cash and shares. However, savers who are currently opening cash Mini-ISAs appear to be unaware that even by putting just pounds 1 into one, they reduce the amount they can invest in equities from pounds 7,000 this year to pounds 3,000.

"Our experience with PEPs shows that the majority of people will leave investing in stocks and shares until the last minute," adds Ms Davis. "It is these individuals in particular who need to think carefully before being tempted by the rates and special incentives."

However, Ms Davis also points to the fact that while the general level of knowledge about ISAs is low, existing PEP and Tessa investors' understanding is much higher.

Some 79 per cent of existing PEP and Tessa investors had heard of ISAs, while almost 40 per cent knew the correct investment limits into one. Half of all existing investors knew that it is only possible to have one Maxi-ISA a year with a single provider, compared to 39 per cent of all investors.