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ISA, PEPs & TESSAs

 

What is an ISA?

Individual Savings Accounts (ISAs) were introduced in April 1999 to replace old style PEPs and Tessas. Yet many people get confused, thinking of an ISA as a complex financial product, and become wary. This is wrong, it's simply a tax free wrapper into which you can place either cash or shares.

Who can have an ISA plan?

  • There are certain rules regarding as to who can have an ISA plan. Since ISAs were first introduced there have been restrictions as to who can subscribe to a plan.
  • In order to make a contribution to an ISA plan you must be UK tax resident (or perhaps a Crown Employee that are serving overseas).
  • In addition to this there are age limits:
  • Anyone aged 16 or over may invest up to £5,100into a cash ISA. People over the age of 18 may elect to invest their money in a Stocks & shares ISA.

If you have any queries about your eligibility for an ISA, please contact us now.

What are the different types of ISA?

  • Stock and Shares ISA - These allow you to invest in either Company Shares quoted on a recognised Stock Exchange, investment trusts, unit trusts or OEICs. You can, if you wish, mix and match the investments.
  • Cash ISA - These allow you to invest in a deposit account with a bank or building society.


Why would I want an ISA?

ISA's are an excellent way for taxpayers to save. Cash ISA's and some other interest bearing ISA's are tax fee where as dividend bearing ISA's are classed as tax efficient, only being liable to a 10% tax credit. This means that for most people they are still paying less tax then through other types of saving plans.

How much can I invest in an ISA?

Under current rules you can invest during any single tax year up to a total of £10,200 into a single Stocks and Shares  ISA . (a tax year runs from 6th April to the following 5th April).

Although the total contribution limit is £10,200, there are individual limits on how much can be invested into the various components of an ISA.

  • Stocks and Shares ISA - It is possible to invest up to the £10,200 Maximum into one of these. However this is only possible if you have not paid money into any other ISA plan in the same tax year.
  • Cash ISA - Amounts up to a Maximum of £5,100 can be paid into a Cash ISA in any single tax year.

Summary of the Maximum amounts you may pay to an ISA plan


Component ISA (Contributions may only be made to one of different components during the tax year)
Cash Up to £5,100
Stocks and Shares Up to £10,200
Overall Limit £10,200



Pro's & Con's


What are the different types of ISA?

  • Stock and Shares ISA - These allow you to invest in either Company Shares quoted on a recognised Stock Exchange, investment trusts, unit trusts or OEICs. You can, if you wish, mix and match the investments.
  • Cash ISA - These allow you to invest in a deposit account with a bank or building society.

What are the tax benefits of an ISA?

Under current legislation ISAs have considerable tax incentives over other forms of investments or savings.

  • Cash ISAs are free of income tax. Other types of ISA are not necessarily free of income tax -it depends what they are invested in. Since 6 April 2004, any income from shares or share-based unit trusts within an ISA is paid with tax at 10% already deducted and this cannot be reclaimed. But there is no tax on any other type of income - for example, interest from gilts or corporate bonds - held within the ISA.
  • You pay no tax on any capital gains achieved by your ISA investments (please note any losses cannot be offset against gains that are subject to Capital Gains Tax).
  • ISA's are not necessarily free of income tax -it depends what they are invested in. Since 6 April 2004, any income from shares or share-based unit trusts within an ISA is paid with tax at 10% already deducted and this cannot be reclaimed. But there is no tax on any other type of income - for example, interest from gilts or corporate bonds - held within the ISA.
  • ISA's are free of capital gains tax. So, if your ISA increases in value, you make a 'capital gain', but you do not have to pay capital gains tax on this increase.
  • You may withdraw your money at any time without losing any of the tax advantages.

There is no requirement for you to declare income and/or capital gains from your ISA plans to the HM Revenue & Customs. You don't even need to mention that you have an ISA on your Tax Return.

 


What happens if I die?

Any ISA plans you hold will end on the date of your death. No tax will become due on any income or capital gains that have been achieved up to that date. However, if the plan continues after your death, then your personal representatives will be liable for taxation on any subsequent income or capital gains.

The value of any ISA plans will be added to the rest of your assets when calculating the value of your estate for Inheritance Tax purposes.

Under the terms of a life insurance ISA the proceeds of the policy will be payable at the time of your death. Although there would not tax to pay on the policy proceeds built up during you life, however if any interest is added by the life insurance company because of late payment of the claim, then this interest would be subject to taxation.

How long must I keep my ISA plan?

One of the major attractions of ISA plans is that they offer you excellent access to your money. You may withdraw your money at any time without losing any of the tax relief granted to your plan.

However most incur an initial cost when setting up so if you encash early this may mean you get less back than you originally invested.

Some ISA plans may run for a fixed period or require you to give notice of withdrawal. With these particular plans you could lose some interest or bonuses should you elect to withdraw your money early. You should always read the terms of your ISA plan carefully and pay particular attention to any conditions applying to withdraw of your money.

Please note that if you invest in a Stock & shares ISA you may not get back all the money you put in. This is more likely if you withdraw you money during the early years of your investment.



Small Print


What are stakeholder ISAs?

From 6 April 2005, new stakeholder products became available. To earn the name 'stakeholder' the products have to meet conditions designed to ensure that the products are straightforward and good value.

There are five stakeholder products:

  • stakeholder deposit;
  • stakeholder medium-term investment product (MTIP), which is a type of unit trust or similar investment;
  • smoothed MTIP, which is similar to with-profits life insurance;
  • stakeholder pension; and
  • child trust fund stakeholder account.


The first three: the stakeholder deposit, MTIP and smoothed MTIP are available in both ISA and non-ISA versions.

Stakeholder ISAs replaced CAT-standard ISAs from 6 April 2005 onwards. However, if you took out a CAT-standard ISA before that date, it will continue to meet the CAT standards. ('CAT' stands for fair Charges, easy Access and decent Terms.)

Neither the stakeholder conditions nor the CAT standards guarantee the performance of a product. They do not mean that the government recommends that product or that the product is necessarily suitable for you. But they do provide a useful benchmark against which to compare other products.


I have an existing PEP or TESSA investment plan?

Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) were the forerunners to ISAs that existed during the 1980s and 90s. Once ISAs were introduced, these began to be phased out, and in April 2008 any money left in them was moved into the ISA regime.

• TESSAs. These were basically cash-based accounts, and between 1999 and 2004 they turned into TESSA-Only ISAs (Toisas). These have now all become simple Cash ISAs, but possibly at a rubbish rate of interest. However, all the normal ISA rules apply, meaning you can transfer and up the rate

• PEPs. Any PEPS which still exist have automatically transformed into Stocks and Shares ISAs. You can continue to invest in them within the rules of normal Shares ISAs, providing you haven't used another Shares ISA during the same tax year. It's also possible to transfer funds from the old PEP into an existing Shares ISA.

Can I change the savings or investments in my ISA plan?

You have the right to transfer an ISA run by one manager to an ISA of the same type run by another manager. But ISA managers do not have to accept a transfer. Watch out for transfer charges.

You cannot transfer from an ISA of one type (for example cash) to a different type of ISA (for example stocks and shares).

Should you wish to include new investment or savings opportunities that are not provided from your current ISA manager then you may have to transfer your money to another manager.