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Toisa and the hare

New Isa regulations are due to come into force on April 6. One effect of the changes is that it will be possible for Tessa-only Isas to be transferred into stocks and shares Isas without affecting the annual Isa allowance.

Isas are the Government’s primary tax-advantaged savings scheme. They were introduced in 1999 to replace Peps and Tessas.

Isas are often the first home for personal savings. By allowing people to save without being subject to tax on any income or gains on those savings, Isas have proved to be a popular, simple savings vehicle.

There are now over 17 million Isas in existence and they are available from a wide variety of providers, including high-street banks, fund managers and even supermarkets.

In 2005, the Government guaranteed the tax-free status of Isas until April 5, 2010 although guidance notes available on the Treasury website state: “Isas are available indefinitely. There is no set end date for Isas.”

Under the new regulations from April 6:

  • The annual Isa investment allowance will be raised to £7,200. All this can be invested in a stocks and shares Isa with one provider. Alternatively, up to £3,600 can be saved in cash with one provider, with the remainder in stocks and shares with the same or a different provider.

  • Isa savers will be able to invest in two separate Isas each tax year – a cash Isa and a stocks and shares Isa. Mini and maxi Isas will no longer exist.

  • Peps automatically become stocks and shares Isas.

  • Individuals will be able to transfer money saved in their cash Isa to their stocks and shares Isa.

    Since Toisas are cash Isas, they will be able to be transferred into a stocks and shares Isa from April 6 without impinging on the annual Isa allowance.

    When Isas replaced Tessas in April 1999, the Isa regulations allowed the capital from a Tessa which had matured after January 5, 1999 to be subscribed into a mini cash Isa, the cash component of a maxi Isa or a Tessa-only Isa within six months of the Tessa maturity date.

    The amount subscribed, typically £9,000, did not count towards the annual Isa subscription limits.

    Only those entitled to subscribe to an Isa at the time could take advantage of this. The last Tessa would have matured on April 5, 2004, so it has not been possible to transfer Tessa capital into an Isa since October 5, 2004.

    The new reforms will allow money first invested in Tessas to be exposed to a wider range of assets, such as shares and collective funds.

    All Isa managers, who may not have offered a Tessa because they were not a bank or building society, for example, will have the chance to attract new inflows of cash from banks and building societies by accepting transfers of Toisas into stocks and shares Isas.

    This has its attractions for Isa managers. For savers, there are more homes for their Toisa savings and therefore more choice, which must be good.

    But one would have to be brave to transfer from a Toisa to a stocks and shares Isa with all the risk that entails. Share prices can fall dramatically, causing substantial losses, as we have already seen this year.

    This is a concern, even more so as Toisas were often originally sold as rainy day savings without much assessment as to the investor’s risk appetite.

    On the other hand, banks and building societies have been offering only around 5 per cent interest on Toisas, well below most rates available for internet savings accounts.

    For savers prepared to take on greater risk, there may be some appeal in using their Toisas to seek the potentially higher returns of a stocks and shares-based fund by transferring their investments into, say, a recovery fund or other collective fund that fits their risk tolerance.

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