WHILST most thoughts at this time of year turn to the inevitable pressures of Christmas, we should remind ourselves of the imminent changes to
ISAs and how these can provide a greater benefit in the future for regular savers. In March this year, the Chancellor announced a welcome raft of changes to these arrangements, which will become effective from 6 April, 2008.
Historically, ISAs replaced general
PEPs, which were limited to £6,000, £3,000 single-company PEPs and the much-maligned Tessa's with total contributions limited to £9,000 over a five-year period, and the option to roll over the capital contributions only for a further five-year period.
The changes announced earlier this year are well overdue, particularly for those who do save regularly. Under the current rules, investors can subscribe to a
maxi ISA, investing a full £7,000 in stocks and shares with one ISA manager. If the same manager offers a cash option within the product, the maximum cash holding is limited to £3,000, any proportion held in cash will reduce the amount that can be held in the stocks and shares portion. As an alternative you can have up to two mini-ISAs in each tax year, either with one ISA manager or two separate managers. This does allow the choice of investing in one or both components of £4,000 stocks and shares and £3,000 in cash.
On their original introduction as a replacement for PEPs the government restricted their availability until 2010. While not confirming a more permanent incentive for savers it has provisionally promised to run as an open ended product beyond this time scale.
As to the changes, the removal of the mini-maxi distinction should make is easier for savers to understand. Indeed the ability to subscribe to either or both components should remove the confusion for savers. A further amendment will permit the transfer of cash ISAs to stocks and shares ISAs in addition to the overall investment increase to £7,200 per annum. The increased limit does include a significant increase to the amounts that can be held in cash to £3,600 per annum. This said, maximising the cash would reduce the level available for stocks and shares to £3,600.
Whilst there are few fiscal incentives to save regularly, these changes, though less than expected, should provide a greater opportunity for building wealth over the long term. Indeed the benefits of modest regular savings in this type of arrangement can be significant over time. Patience, good quality fund management and regular reviews can make all the difference.
