The range of options on ISAs make them a hard test of financial competence

INDIVIDUAL SAVINGS Accounts, or ISAs as they are more commonly known, are exercising my mind at present - and not just because I have to try to describe them in words of one syllable to the investing public.

Like many in the investment world, I rather regretted the passing of PEPs. They may have been beset by rules that made them complicated to administer, but we became used to them.

Over the years the Government made an alteration here, tweaked the rules there - but by and large they took note of the opinions of the investment industry, so eventually we achieved a half-way workable product. We do not know about ISAs yet, but there are aspects to them which give some cause for optimism.

One of the more aggravating aspects of investing for a PEP portfolio was the need to concentrate upon UK and European stocks. Put a unit trust or an investment trust in that is not predominantly invested in an acceptable area, and you are limited to just 25 per cent of the PEP. But determining what was acceptable created additional work. They have avoided this trap with ISAs.

But in true governmental form, the authorities have decided to complicate the issues so that it is now not the investment manager who feels confused but the investor. Mini and maxi-ISAs, with their range of options which include cash, life assurance and stocks and shares, seem certain to make them one of the harder tests of financial competence among those seeking to put their money away in a tax-friendly environment for the longer term.

I can just about see the argument for keeping pounds 1,000 of bank deposit money away from the clutches of Hector the Tax Inspector (actually it is pounds 3,000 for this year, but it still compares unfavourably with the Tessa allowance) - but pounds 1,000 in life assurance? It tells you more about the power of the lobbyists than the investment imperatives of the people the Government is trying to encourage to save for their future.

As it happens, maxi stocks and shares ISAs do not look a bad idea at all. pounds 7,000 in year one may not be as much as we could have put into a PEP, but it is better than nothing. And pounds 5,000 a year thereafter at least allows you to build a nest egg. In the guaranteed life of an ISA you could build up a fund worth pounds 52,000, plus investment return. For some people that could be as much money as is in their pension.

So, how should you invest your ISA? If you are fortunate enough to have an existing portfolio of stocks and shares, simply use it as an extension to that - but don't forget to put in your high growth prospects as the only real advantage is freedom for capital gains tax.

For more modest investors the choice is more difficult. CAT standard ISAs will be restricted to tracker funds, which at least have the merit that the charges are low. But come a bear market - I do not dare think what might happen.

Perhaps a smaller company fund might be a bit of fun for this particular ISA. Or something in South East Asia.

Brian Tora is head of Greig Middleton Asset Management