What are ISAs?
Individual Savings Accounts – better known as ISAs - were brought in to replace Tessas and PEPs in April 1999. An ISA is simply a tax wrapper in which investments such as cash, shares and stock market funds can be held to avoid capital gains tax and reduce income tax.
If you are going to invest in equities, you should start by making the most of your ISA allowance. It certainly makes sense for higher-rate income taxpayers, while any gains are free of capital gains tax for everyone. Remember the adage of building a balanced portfolio and consider your investment needs before deciding which ISA to invest in.
Types of ISA
There are two types of ISA – a stocks and shares ISA and a cash ISA
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A stocks and shares ISA has a limit of £7,200 for any one tax-year and in it you must hold shares or funds.
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Cash ISAs have a limit of £3,600.
The interest you earn from a cash ISA is free of income tax and you do not pay any capital gains tax on stocks and shares ISAs.
Importantly, the overall ISA limit for any tax year is £7,200. Please note that Itshenderson only offer a stocks and shares ISA.
Not surprisingly, UK equity ISAs are far and away the most popular choice for British investors. This is understandable as there are strong arguments for starting at home - there are no currency risks and names of the companies the funds invest in are often familiar.
The art of building the right portfolio is all about tailoring it to your own needs - whether, say, you have a greater need for income or for capital growth - as well as your attitude to risk. The sensible investor takes into account the amount of risk they are able to tolerate, both psychologically and in terms of their individual needs. It is therefore vital to understand the different levels of risk inherent in different investments for buying an ISA.
PEPs
PEPs, or ‘Personal Equity Plans’, which were superseded by ISAs as a popular tax efficient savings vehicle, are no longer available to new subscriptions. Existing PEPs were converted to ISAs as at 6 April 2008.
If you are an investor that holds a former PEP now may be a good time to spring clean your portfolio and check under the bonnet of your investment. There is still more than £39bn invested via these old-style plans launched in 1987, yet a survey by Hargreaves Lansdown, the independent financial adviser, showed that two in three PEP investors have never reviewed their investments.
However, many funds that were top-performers in the late 1980s and early 1990s will have fallen from grace, while other former PEP funds may have changed their objective or have merged with other funds. Leading fund managers may also have retired or joined another company and so it may be worth reviewing your holdings.
It is worth remembering that all existing PEPs became ISAs on 6 April 2008 and their rules now fall in line with ISA rules. The early PEP rules restricted investors to investing most of their money in UK and Europe stocks. But that is no longer the case, which may be important given the changing dynamics of the investment world and the emergence of economies such as Eastern Europe and China. There is nothing preventing you from transferring part of the contents of a former PEP to another ISA manager, rather the whole lot.
