ISA - Individual Savings Account

How to buy an ISA

Background to ISA's

An ISA is an individual savings account, which is a tax efficient term for a number of savings vehicles, the rules having been established by the Government. ISA's are the successor to Personal Equity Plan's (PEP's) and Tax Exempt Special Savings Accounts's (TESSA's). The underlying investments can be packaged as unit trusts, investment trusts, a portfolio of stocks and shares, insurance funds, bank and building society deposit accounts, money market funds or certain National Savings products.

Maxi ISA's

The maxi ISA is offered by a single company. You can invest up to £3,000 in cash; up to £1,000 in life insurance; and the balance up to £7,000 in unit trusts, OEIC's (or open ended investment companies, the modern version of unit trusts), investment trusts and stocks and shares.

The most popular choice is to invest the entire annual ISA allowance in the unit trust/OEIC, investment trust and stocks and shares component. But the rules as they stand are that you cannot, at some time in the future, switch your holdings into cash or insurance options

Mini ISA's

The mini ISA allows you to choose a different ISA manager for each of the cash, insurance, and stocks and share options. So the cash component could be put with one manager, the insurance component with another and the stocks and shares component with a third manager.

You can invest - up to £3,000 in cash; up to £1,000 in life insurance; and up to £3,000 in unit trusts, OEICs, investment trusts and stocks and shares. In subsequent years, you can invest up to £1,000 in cash; up to £1,000 in life insurance; and up to £3,000 in unit trusts, OEICs, investment trusts and stocks and shares.

Cash ISA's

This can include bank and building society deposit accounts, cash unit trusts, money market funds and any National Savings products except Savings Certificates and Premium Bonds. Many banks and building societies have been heavily pushing cash ISA's as the successor to TESSA's and there have been concerns that investors are being encouraged down this route without fully considering the alternatives.

Life Assurance ISA's

Life assurance is not offered by as many providers as the other two types of investment but is slowly becoming more popular. It is important to remember here that the life insurance product inside the ISA is intended for savings rather than insurance. The product will cover a range of unit-linked and with profits savings options. Most of the providers here have favoured the with profits fund as the underlying investment which is often described as suitable approach for cautious investors who may wish to gain exposure to the stock market with limited risk.

Mortgage ISA's

The majority of all UK mortgage lenders offer interest only mortgages. Interest is paid to the lender and you are responsible pay off the original debt. This is done the taking out of a savings vehicle. Endowments were previously very popular, but they have now fallen out of favour. PEP's starting to slowly become popular in the 90's as a repayment vehicle for a mortgage but their replacement by ISA's means that public awareness has to start growing all over again. However, ISA's have all the same characteristics of PEP's and there is no reason why they cannot also become one of the most popular vehicles for repaying a mortgage.

ISA - CAT Marked

A standard has been introduced by the Government to ensure that investors are getting the best possible deal on Charges, Access and Terms for an ISA investment - the CAT standard. But what does it actually mean to you?

Cost - Total charges of no more than 1% of the next asset value (that is the total value of your investment fund) each year. Many funds have an initial charge, higher annual management charge and some even an exit charge.

Access - Some investments stipulate a minimum of several thousand pounds but a CAT standard fund offers you access to a specific fund at a more affordable rate, from £500 lump sum to £50 for monthly savings.

Terms - Clear and easily understood literature, explaining exactly what you need to know and the risks you are taking with your money.

You might assume that the investment industry would embrace the CAT standard in order to deliver value-for-money investment products to consumers. However, of all the investment funds currently available, only 49 adhere to the CAT standards* of which almost a quarter are available from one company.

*Source - AEQUOS Research Dept - 30/01/2001

Independent research** has concluded there is 'no link between the level of charges and investment performance'. The argument that investors must pay higher charges to obtain better performance is often no the case. The trend often indicates that a more cautious investor happy to invest in equities is probably safer to choose a CAT marked ISA. It is only that the major investment houses and specialist funds find it difficult to operate in the CAT standard and therefore the higher risk greater choice plans tend to operate outside this benchmark.

**Fitzrovia International as at 31/10/1999

Clearly it is possible that a CAT marked ISA is appropriate for certain investors and the NON CAT marked ISA often providing specialist fund links and wider investment choice appropriate to many others. It is also worth considering that many of the additional up front costs associated with a NON CAT marked ISA, can be avoided if you do the research yourself.

Independent Financial Advisors, like Specific Financial Management Limited, are happy to transact business often reinvesting any initial commission in return for not providing costly advice. This is only recommended if you know exactly what you want and need no advice in any area and pass your instructions to the IFA. In fact this is one of the few areas where by transacting the business through and intermediary you save money and still purchase the identical vehicle with no compromise on quality.

This route is not recommended if you require a full advice and recommendation service where all your needs and requirements are taken into account.

Past performance is no guide to future performance and the value of your investment can go down as well as up.

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