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A new isa age

This little piggy can go to market when the new Isa rules come in next April. Standard Life product manager for savings and investments Gerry McGrath says detailed changes unveiled last month will clear up the mini-maxi confusion and allow cash holdings to be transferred to stocks and shares

Isas are set to undergo their most fundamental change since they first became available. As some of their key limitations are overhauled from April 6, 2008, there will be added reasons for financial advisers to review client holdings.

When Isas were introduced in 1999, the Government made a commitment to keep them going for at least 10 years and to review them after seven years. The results of the review were announced in last November’s pre-Budget report, when several changes were proposed. Details of the new regulations were published at the end of July.

The first change is a commitment that the Isa regime will continue indefinitely. The overall amount that an investor can place in an Isa each year will increase to £7,200, of which £3,600 can be held in cash. The new amounts will make it easier to calculate monthly payments.

The original structure for Isas was needlessly complicated. There were three components – stocks and shares, cash and insurance – each having its own subscription level.

A central part of the Isa’s design was the confusing concept of mini and maxi accounts. Isas will no longer have a distinction between mini and maxi accounts and instead there will simply be cash Isas and stocks and shares Isas. Tessa-only Isas will become cash Isas.

The removal of the mini and maxi designations will also apply to previous years’ subscriptions so that cash components will be known as cash Isas, whether or not they were held with stocks and shares in a maxi Isa.

Peps will automatically become redesignated as Isas and the Isa rules for investing in insurance and stakeholder products will be extended to them so that these products will be available as transfer options for former Peps.

The relationship between cash and stocks and shares subscription levels is similar to before. If an investor puts no money into a cash Isa in any tax year, the entire £7,200 allowance can be invested in a stocks and shares Isa. Any amount put in a cash Isa is deducted from the amount available for stocks and shares.

An investor can hold a cash Isa with one provider and a stocks and shares Isa with another. If they prefer, they can hold both types with the same provider. If they decide to switch providers, the cash and stock and shares Isas are treated separately, even if both are held with a single provider.

Minimum age limits remain as before. A person must be 16 or older to take out a cash Isa and the minimum age for a stocks and shares investor is 18.

Since Isas were introduced, it has been possible for an investor to have put £24,000 into cash. The actual Isa value will be more when tax-free interest is included. However, many investors may not need to have as high a proportion of their assets invested in cash. The Isa rule changes will provide a valuable opportunity to consider how these investors have structured their savings and what changes they could make to meet their needs better.

From April 2008, existing Isa investors will be able to switch some or all of their previous cash Isas into stocks and shares Isas without losing their tax allowances or reducing their allowance for the new tax year.

For a husband and wife who have used their maximum cash Isa allowance since launch, this could easily amount to over £50,000 held in cash. The changes to the Isa rules make it easier for investors to rebalance the level of cash in their portfolios without losing any of the tax breaks.

Investors will also be able to switch a cash Isa taken out in the current tax year into a stocks and shares Isa. The amount switched counts towards their stocks and shares allowance only and they can start a new cash Isa as if they had not taken one out in the first place.

The process for switching from a cash Isa to a stocks and shares Isa is the very same for current stocks and shares transfers. A transfer form is completed and sent to the new Isa manager.

However, the rules do not permit traffic in the opposite direction and investors cannot switch current or previous stocks and shares investments into cash Isas.

When a child trust fund matures at age 18, this money can now be transferred into an Isa without losing its tax advantages and without using any of the investor’s Isa allowance for that year.

In advance of the new tax year, providers will write to existing Isa customers to inform them of the changes and what they will mean.

These changes will provide genuine scope for advisers to review clients’ investments and asset allocation. Indeed, some investors could see grounds for complaint if they were not made aware of the greater flexibility to manage their Isas.

The increase in annual subscription limits is disappointing at less than 3 per cent but there is much positive news. Removing the awkward mini and maxi classifications will improve understanding of how Isas work. The chance to unlock cash holdings without losing tax advantages should also prove attractive, particularly as the variety of investment funds has changed significantly since the first cash Isas were taken out.

The average Isa investment may not seem an attractive advice proposition on its own but these changes offer the opportunity to review eight years of Isa investments.

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