ISAs: New rules and new opportunities

This week sees new ISA rules introduced to simplify tax-free savings, but with current stock market instabilities where to invest is more difficult than ever.

The biggest change to ISAs – individual savings accounts - is the amount you can put aside is set to rise to £7,200.

The old distinction and confusion of maxi and mini ISAs is also going. Up to £3,600 can be saved a year in a cash ISA with the remainder going to stocks and shares ISAs.

So if £500 is saved in a cash ISA £6,700 could head to a stocks and shares ISA, and all old mini stocks and shares ISAs and the stocks and shares component of a maxi ISA will automatically become stocks and shares ISAs.

ISA savers will also be able to transfer money saved in a cash ISA to a stocks and shares ISA.

Angela Eagle, exchequer secretary to the Treasury, says the reforms will make ISAs simpler and more flexible.

"This year, over 17 million existing ISA holders will benefit from these reforms. The reforms will also benefit all those people who are thinking about saving in an ISA for the first time… ensuring that tax relief on savings is more fairly distributed."

Despite the historically better returns from stock and shares, cash ISAs have always remained more popular, with savers preferring the simplicity and ease of the products.

In total the UK has saved around £287 billion in ISAs and PEPs (which under the new regulations will become ISAs).

Between April 2007 and January 2008, 10.5 million ISAs were opened – 9.1 million of which were cash ISAs, according to figures from HM Revenue & Customs (HRMC).

The average cash ISA stood at £1,990, while the average stocks and shares ISA was £1,390

Current volatility in the stock markets means investors and savers are looking for stability and safety, further increasing cash ISA rates.

Peter McGahan, managing director of Worldwide Financial Planning, explains more bad news is expected from the markets but there is an opportunity to buy.

"Markets tend to overreact," he said. "The opacity of the market, i.e. not knowing what problems are out there, are of a serious issue to investors and no-one really wants to be first to dip their foot in the water to find out if there are any alligators in it.

"In practise and with history on our side, fortune favours the brave and like every other serious dip, those that purchased when all else were scared tended to be the bigger winners.

"In the long-term today will be considered a buying opportunity but that doesn’t mean a mad approach to investing.

"There will still be bad news and that bad news will take some unwinding so for the time being look for the funds which are focused on value and also those that are nimble enough to maximise the volatility."

Mr McGahan also suggests Saracen Growth Alpha and New Star Alpha funds are good alternatives to consider, but warns people to steer clear of commercial property funds for now.

"If you are uncomfortable with volatility however ensure you don’t miss using your cash ISA," he adds.

With simpler ISA rules and banks and building societies queuing up to take your cash, making sure you pay less tax and build up a nest egg for the future should be everyone's priority.

Daniel Barnes