Individual Savings Accounts

There are two types of ISA: cash ISAs and stocks and shares ISAs. You are allowed to invest up to £11,280 into an ISAs in the current tax year- which is from April 6th and April 5th. You can invest as much of this £11,280 into a stocks and shares ISA as you want but you cannot exceed the contribution limit of £11,280. You either "use it or lose it"- in other words, you cannot fund against past tax years where you did not maximise contributions. There is no need to commit your money for a minimum period; nor any restrictions on how you spend the proceeds. Further, you do not have to declare income or profits from any ISAs in your tax returns.

Stocks and Shares ISAs

A stocks and shares ISA, sometimes referred to as an equities ISA, is effectively a tax advantaged wrapper which has wide ranging investment powers. Investments which can be held within an equities ISA include unit trusts, investment trusts and open ended investment companies (OEIC). These are all diversified investment vehicles where the risk is spread across a basket of individual shares which have been selected for purchase by a Fund Manager. There is an extensive range of equity funds to choose from, covering a wide range of geographical sectors, investment styles, risk profiles, size of companies, as well as ethical mandates. However, there are other non-equity based funds which can be accessed via an ISA which can add to the diversified nature of a portfolio. Some funds specialise in commercial property, other invest in government and corporate bonds which are loans to be repaid by the issuing government or company.

The minimum amount you can invest on a monthly basis is £50 per month. A unit trust is simply a pool of individual investors’ money, which buys a spread of investments. The trust is then divided into units and the number of units you buy represents your share of the trust. By pooling many investors’ money, the fund aims to provide a greater spread of investments than you might be able to achieve on your own. Consequently this can help reduce the risk as well as providing you with the benefits of expert fund management. These trusts aim to provide capital growth or income or a combination of both.

Charges

A fund management group will typically charge a yearly management fee of between 0.3% and 2.2% - most charges tend to be between 1.0% – 1.5% per annum. In addition to this, they often charge separately for the fund’s “additional expenses” such as distribution fees and servicing costs. These two charges combine to form the Total Expense Ration (TER), which is deducted from a fund on a daily basis .There are also initial charges to consider which vary from 0% - 5.5%. These are deducted from contributions and affect the allocation rate of the investment. Combining all charges to assess the effect of charges given assumed rates of investment growth gives a figure known as a “Reduction in Yield”. The reduction in yield shows the amount by which a fund’s charges can be expected to reduce the investment return on a policy.

Tax Treatment

Cash ISAs are completely free of all taxes. Equity ISAs are completely free of all capital gains tax, however there is a small tax which the fund managers pay on dividend income from shares.

What are the risk factors to be considered?

• Both capital and income values may fall as well as rise, are not guaranteed and you may not get back the full amount of your original investment.
• The performance of your investment will generally follow the performance of the market in which it invests. Where this market declines, the value of your investment will probably also fall.
• The level of risk associated with any fund will be affected by the investment choices made by the fund manager. This level of risk may also change over time as the fund manager significantly changes the investments held by the fund. Any changes would be within the investment objectives of the fund.
• Unless the performance of your investment meets or exceeds the rate of inflation, the real value of your investment will reduce.
• If you exercise your right to cancel your investment, you may not get a full refund of the amount paid if the value of the investment falls before the notice of cancellation is received by the Investment House. This is because an amount equal to that fall in value will be deducted from any refund you would otherwise receive.
• Where you switch from a fund where you are receiving income, any income received by the fund since the last payment will be reinvested in the new fund rather than paid out.
• The current tax situation may not be maintained.