ISA's FAQ

With the end of the tax year nigh, Pink Finance has compiled a list of your most popular questions relating to ISAs. Many of you will be anxious to take advantage of your personal limit. Investment Managers will all be pushing their products, claiming to offer the highest returns and most competitive charges. Many will make claims relating to past performance, which you're advised to look at very closely. Many companies hand pick periods of good returns and are not so willing highlight the downsides. You should remember that the performance of ISAs in Stocks and Shares could fall as well as rise. It is advisable to hold this type of investment for at least five years. If in doubt, call in a specialist, who can assess your attitude towards risk and your investment aims. Make certain of the facts before you act

What is an ISA account?

ISA accounts followed the predecessors, PEPS as a form of protecting savings from tax. The government are happy to offer incentives for people who invest money. This has become an important part of our economic stability and planning for people's future.

What is the advantage of opening an ISA account?

Any income or growth generated within the account will be tax-free. Both from income and capital gains tax. A Unit Trust held outside an ISA wrapper, would be subject to both. You should always use your limit first.

What is the difference between a Maxi and a Mini?

A Maxi invests into Stocks and Shares, whilst a Mini allows you to split your investment between Cash and Shares. Stocks and shares traditionally have offered higher returns than cash deposits. You should remember that the value of shares could fall as well as rise.

What are the maximum contributions that I can make?

You are allowed to make £7,000 into a Maxi Stocks and Share ISA in any tax year. You could, of course, pay in lump sums over the year, or indeed make regular savings. Just don't exceed the maximum.

£3,000 into each Mini Cash / Stock and Share ISA on a lump sum or regular savings basis. It's up to you.

You are also permitted £1,000 into an Insurance Fund ISA.

How many ISAs can I have?

You're allowed to buy one Maxi per year. Once you've selected your "Manager" you cannot select another this year. Choose wisely, it can be costly to switch later, although not impossible.

Two if they are Mini Cash and a Mini Stocks and Share versions. Of course you are able to split your investment between two providers if they are Mini investments. It is unlikely that you would get the best deal from the same provider for both cash deposits and Stocks and Shares versions.

How do the government know if I've bought more than one in any tax year?

Your National Insurance number is recorded upon purchase of your ISA account. It may take a while for them to catch up with you, but when they do, you will be required to pay tax on the returns of the second one that you took out. The investment will be closed and the money returned to you. This would be a shame, especially if the second one was the best performer. Unfortunately you're not allowed to choose which one to keep.

What types of investments can I hold in a share ISA?

You could buy a Managed Fund through an Investment Manager. Or select individual share holdings to place into your account (these are known as Self Select ISA's). Managed Funds are seen as higher risk than deposits, but lower than individual stocks and shares.

What is a CAT standard?

These are Government Standards relating to Costs, Access and Terms. If an ISA account meets the standards, it will qualify for a seal of approval. A CAT product should have Low costs, Easy access and Fair terms.

What are the charges when taking an ISA?

If an ISA is CAT standard there will be only one charge of 1% per annum. There will be no up-front charges. If the account is non-CAT, the initial charges could be up to 5% with an Annual Management Fee of 1.5%. The up-front charge is normally taken via a bid / offer spread. On any given day there will be a 5% difference between the buying and selling price of the fund. You will only normally feel the full effect of this if you sell on the same day of purchase. Remember, these investments are intended for at least a five-year period. The longer you keep them the lesser the effect of initial charging.

What are the differences between CAT and Non CAT accounts?

You are likely to receive a wider choice of funds to invest into with Non CAT investments. Your fund choices may be limited on a CAT standard ISA to Tracker Funds only. There are one or two providers that will actively manage your money within their CAT standard funds. These are well worth seeking out advice for.

What is a Tracker Fund?

Many CAT ISA's invest into Tracking Funds. These follow the performance of the market, ie. the "FTSE 100". The aim of the fund is to mirror the part of the market that is being tracked. You should be careful not to select an index that is weighted heavily to two or three holdings.

Subscribe to the Pink Finance monthly newsletter and keep abreast of what's new on the site by clicking here. Your address will not be shared with any third party and you may unsubscribe at any time.

Please note that the articles contained within this site were written for Pink Finance and are subject to copyright. They may not be reproduced in any form without prior written permission from the editor. Graphics/images/logos and site design are by John Myers and remain his copyright. Likewise, they may not be reproduced in any form without prior written consent.