The options for investing in individual savings accounts (ISAs) have been significantly simplified and expanded over the past couple of years. It is, therefore, useful to get up to speed on how broad the investment scope now is.

For the uninitiated, it will also be useful to run through just what an ISA is, what you can invest in and hold within an ISA and who is eligible for investment.

Wrapping it up
An ISA – really just a wrapper – is a means of holding savings in cash and investment in
stocks and shares in a largely tax-free environment – there is no liability to income tax
or capital gains tax for the investor.A key part of the recent simplification of the ISA regime is that you can now invest either £7,200 per annum into a stocks and shares ISA or £3,600 into a cash ISA and the remainder – i.e. up to a further £3,600 – into a stocks and shares ISA.

You can also reinvest the £3,600 from cash into stocks and shares if you wish.
Within a stocks and shares ISA, you can hold individual stocks and shares, or collective
investment products such as unit trusts, investment trusts and open-ended investment
companies and life insurance products. Within a cash ISA, you can hold deposit accounts from banks and building societies,National Savings products and other cash return producing products like money market funds.

As to who can invest, you must be aged 16 or over.However, up until the age of 18 you can only invest in the cash version. ISA holders must be UK resident for tax purposes and you can’t invest in an ISA on behalf of a third party or own one jointly with anyone else.

But for the family this can be a good thing. As each individual can hold one, couples can
invest £14,400 in a tax-free wrapper each year. Also, if you have money in a Child Trust Fund account, once the child becomes 18 that money can be rolled over into an ISA.

A boost to your savings
The key question for investors has to be, given disappointing savings rates on bank accounts, can investors get a better deal for their cash through ISAs?

‘Cash held in an ISA does not suffer any tax on the interest – this is a good benefit for
taxpayers,’ says Amanda Davidson, a director of Baigrie Davies. But Davidson adds that with interest rates tumbling so fast at the moment, it is hard to recommend specific providers.

‘Rates on cash ISAs may not always remain the most competitive, so it pays to shop around and review rates every so often,’ she says. ‘Any penalties will be in the original terms and conditions, but many have no penalties for moving funds. It is possible to move cash in ISAs to equity ISAs now.This may be a good option depending on timescale and risk tolerance.Costs for this will depend on the fund chosen and will be part of the decision as to whether to move funds or not.’

Danny Cox, head of financial advice at Hargreaves Lansdown, says that, as holding
cash in an ISA will improve taxpayers’ returns on their savings, in principle it is a good idea. ‘Cash ISA rates tend to be at least as good as the better instant-access internet accounts, since banks and building societies use cash ISAs as a way of attracting
new customers.’

He adds, ‘Non-taxpayers get no additional value from cash ISAs. However, if they think
that they will become taxpayers in the future, they should still use cash ISAs to build tax-free savings.This is important because if you don’t use your ISA allowance in any given tax year then you lose it.’

Time to switch?
For those already investing in ISAs, should you be reviewing your holdings and switching around? ‘Definitely,’ says Jason Hollands of F&C Management. ‘Fund managers change jobs and the star funds of the past may have fallen from grace. More importantly, are you exposed to the right mix of funds and asset classes – shares, bonds, property, cash – to suit your current risk profile and objectives?

‘If you are unsure, you should seek a review with an independent financial adviser or perhaps consider moving into a “multi-manager fund”, which invests across a range of funds, constantly monitoring and reviewing each holding.’

Cox says investors should always review their ISAs at least annually to assess whether their investment goals have changed, whether they have changed their views on risk, and whether their fund choices are the right ones to achieve their savings goals and are in line with the risk they want to take.And lastly, they should find out how well their funds are performing.

He believes fund supermarkets are the best way to manage a portfolio of ISA holdings: ‘A fund supermarket allows you to hold as many different ISA investments as you wish, all in one place, with only one set of paperwork and, in most cases, far more cheaply than investing with the investment companies direct.’

He adds, ‘Fund supermarkets allow you to buy your ISA holdings at a discount of up to 5.5 per cent, and the better ones also refund some of the annual charges in the form of loyalty bonuses.And you can switch online or over the phone at minimal cost and very quickly. If you hold the ISA direct, you have to instruct the company to transfer to the next investment house, sell to cash and then reinvest, which takes time and is awkward to arrange.’

Safety first
As to where and in what to invest, Cox says if investors want a ‘safe’ ISA where their capital won’t fall in value, they should opt for cash, or perhaps buy a gilt and hold it until maturity (also best done through a fund supermarket).

He asserts that ‘For most people, ISAs represent the opportunity to build a highly taxefficient portfolio of stock market or fixedinterest investments, which should be held for at least five years to provide the best opportunity for growth.’

With all the current uncertainty over equity investment and the level of interest rates on
savings, it is hard to know what investments to choose. ‘In current market conditions, corporate bonds and equity income have good prospects,’ says Cox. ‘With falling interest rates and depressed corporate bond prices, current yields of seven per cent are achievable in relatively low-risk corporate bond funds.’

He adds, ‘Equity income funds have taken a battering in the past year or so, so valuations and yields now look attractive. Larger companies should fair better through recession and see growth before smaller companies, which adds to the argument that equity income funds should do well soon, as they tend to invest in these larger companies. Funds like Jupiter Income (five per cent) and Artemis Income (six per cent) should provide a good long-term performance, though yields may fall.’

Tax efficiency
After pensions, ISAs can be viewed as one of the most tax-efficient investment options and, as such, can be used as part of an individual’s saving for retirement, education funding or just as a way of building up a tax-efficient nest egg, according to Peter McGahan, managing director of independent financial adviser Worldwide Financial Planning. But he warns, ‘You should not, however, let the tax tail wag the dog in deciding whether to invest or not. Due to the large number of investment choices, by investing in an equity ISA you can invest for “income” or “growth” or a combination of the two, potentially making them more attractive than cash ISAs if viewed as an investment, rather than as part of your cash reserve.’