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Understand ISA's.

Individual Savings Accounts are a scheme of tax-free investment introduced from 6 April 1999 and replace tax-exempt special savings accounts (TESSAs) and personal equity plans (PEPs). The ISA scheme will run initially for ten years but will be reviewed after seven years to decide whether any changes will be necessary after ten years. The Government's objectives for ISAs are to develop and extend the savings habit by encouraging those on low incomes to save, and to ensure that tax relief on savings is fairly distributed.

Please read on.

There are three groups of qualifying ISA investments:

  • Cash:
    • Building society accounts.
    • Bank deposit accounts.
    • Authorised unit trust money market funds.
    • Certain National Savings products.
  • Stocks and Shares:
    • Equity shares listed on a recognised stock exchange.
    • Many authorised unit trusts, investment trusts, open ended investment companies and other collective investment schemes.
    • Building society permanent interest bearing shares (PIBS).
    • Corporate bonds, UK Government securities (gilts) and other European Government securities (with more than five years to run to maturity when purchased for the ISA).
    • Cash may also be held on deposit temporarily, but only for the purpose of investing in qualifying shares and securities.
  • Life Insurance:
    • Certain single premium life insurance policies.

There are three types of ISA:

  • Maxi - made up of one or more components, but including at least the stocks and shares component.
  • Mini - made up of a single component.
  • TESSA-only - invested only in the cash component
Please read on.

The maximum investment in any tax year is as follows:

  • Maxi ISA:
    • Overall maximum: £7000, of which:
    • Stocks and Shares component, not more than: £7000.
    • Cash component, not more than: £3000.
    • Life Insurance component, not more than: £1000.
  • Mini ISA:
    • Stocks and Shares component: £3000.
    • Cash component: £3000.
    • Life Insurance component: £1000.

You cannot subscribe to both a maxi ISA and a mini ISA in the same year, but you can choose different options in different years if you wish. The main feature of a maxi ISA, with a single ISA manager, is that you can invest the maximum amount allowed each year (£7,000) wholly in stocks and shares. Using mini ISAs, the maximum amount that can be invested in stocks and shares is £3,000 each year. However, the extent to which you might wish to invest in stocks and shares will be determined by a number of factors, including your attitude to risk and the level of the stock market. For example, are you prepared for the value of your investments to go down as well as up? Also, if you are not a higher rate taxpayer, nor likely to make significant capital gains chargeable to tax, the tax benefits obtainable from holding stocks and shares within an ISA are relatively small. The main advantage of mini ISAs is that you can have a different ISA manager for each component. With a maxi ISA, the one manager looks after all components and may not necessarily even offer the cash or life insurance components. However, mini ISAs allow you to shop around for the best manager for each.

Please read on.


Withdrawals from an ISA have no effect on the subscription limits. For example, if you subscribe £3,000 to a cash mini ISA on 1 May 2004 and withdraw £2,000 on 3 June 2005, you cannot make any further subscriptions to that mini ISA in 2005-2006 because the annual subscription limit has already been reached. Subject to the terms and conditions of an ISA, you may make withdrawals from or close an ISA at any time without loss of tax exemption.

TESSA-only ISA's

If you have a matured TESSA you may (provided you are resident in the UK) subscribe up to the total amount you paid in (ie excluding interest credited) to the cash component of an ISA (maxi, mini or TESSA-only) within six months of the TESSA maturity date. Amounts subscribed in this way do not count towards the annual subscription limits and may be made at any time during the six month period, which may straddle two tax years. This rule applies to TESSAs maturing at any time after 5 January 1999 (provided you have not opened a further TESSA before 6 April 1999 - the proceeds of which may benefit from this rule on maturity in 2004). Although no new TESSAs may be opened after 5 April 1999, subscriptions may continue to be made to a TESSA open on that date, without counting towards the annual ISA subscription limits.

Personal Equity Plans

All personal equity plans (PEPs) held on 5 April 1999 may continue to be held as PEPs outside the ISA scheme, but with the same tax advantages as ISAs. No new subscriptions may be made to PEPs after that date, and funds from PEPs may not be transferred directly to an ISA.

Please read on.


To be eligible to subscribe to an ISA you must be an individual aged 16 or over resident and ordinarily resident in the UK (subject to an exception for some Crown employees). If you cease to meet the second condition you may not make further subscriptions to an ISA, but may keep the continuing benefit of the tax reliefs on the accumulated funds. ISA's are held by individuals, so couples can hold one each but not in joint names.

Please read on.

ISA Applications

Applications to subscribe to an ISA may be made in writing, electronically or by telephone. Some ISA managers will accept written applications only. You will need to give various details, including your full name, permanent residential address, date of birth and national insurance number. Where the application is made in writing it must be signed. For applications made electronically or by telephone a printed copy of the information given will be sent to you by the ISA manager for checking. Normal account opening procedures, such as providing proof of identity and address, apply for ISAs opened by new customers. In certain circumstances ISA applications may be signed by someone acting on behalf of someone else, such as cases of physical or mental incapacity. An ISA application remains valid for subscriptions to that ISA made in the next and subsequent tax years. However, where a break between subscriptions to a particular ISA lasts for a whole tax year, you must make a fresh application before subscriptions to the same ISA may re-commence.

In any tax year you may subscribe to only one maxi ISA or to one of each of the three mini ISAs.

ISA Transfers

Funds may be transferred from one manager to another. If the transfer is to be of current year subscriptions, the whole of those subscriptions must be transferred. For future years, funds in an ISA from previous year investments may be transferred from one manager to another in whole or in part. An ISA manager may make a charge for making a transfer and are not obliged to accept transfers. Funds may NOT be transfered from one ISA component to another, say from cash to stocks and shares.

Other terms and conditions

A building society or other ISA manager is required to include various matters in its terms and conditions for ISAs. However, except as mentioned below (concerning ISAs meeting the voluntary CAT standards), such matters as whether interest is fixed or variable, the rate of interest payable, the frequency of paying or crediting interest, minimum balances and transaction size, whether withdrawals are restricted, penalties or charges for early closures or transfers etc are all a matter for the individual building society or other manager.

Whether there are charges for ISA's depends on the type of ISA. Building societies and banks do not usually make charges for the operation of savings accounts, and are unlikely to do so for cash ISAs except, in some cases, on early closure or for making a transfer to another manager. There may be an initial charge and/or an annual charge made by the managers of stocks and shares and life insurance ISAs. Charges on ISAs meeting the CAT standards, see below, are restricted. In the case of cash ISAs, the CAT standard is for no one-off or regular charges of any kind. Charges for CAT standard stocks and shares ISAs must not be more than 1% of net asset value per year, and for life insurance ISAs, not more than 3% of the value of the fund per year. Charges on non-CAT stocks and shares and life insurance ISAs could be higher.

Please read on.

CAT Standards

The Government has issued CAT standards for each of the three ISA components covering

  • Reasonable Charges
  • Easy Access
  • Fair Terms

The CAT standards, which are intended to increase transparency, empower consumers and help more people get the savings habit, are voluntary. ISA managers are required to state in their advertising whether or not their ISA products meet the CAT standards.

To meet the CAT standards ISAs must be simple, clear and fair, and customers must not be required to buy some other product with a CAT standard ISA. Providers of CAT standard ISAs must be committed to continuing to provide the product to customers who have one.

CAT standards for cash ISAs:

  • Charges:
    No one-off or regular charges of any kind, for example, no charge for withdrawals or for any regular service (such as use of ATMs), except that charges for replacements (such as duplicate statements, lost cards) are permitted.
  • Access:
    Minimum transaction size no greater than £10. Withdrawals within 7 working days or less.
  • Terms:
    Interest rate no lower than 2 percentage points below base rate. Upward interest rate changes to reflect base rate movements within a calender month. Downward changes may be slower. No other conditions, for example, no limits on frequency of withdrawals.

This does not mean that you should always choose a CAT standard ISA. The CAT standards are designed to identify a range of straightforward savings products which are simple, clear and fair so that savers should feel confident about choosing them. However, the CAT standards do not mean:

  • That the ISA is appropriate for every saver.
  • That the performance of the ISA is guaranteed.
  • that CAT standard ISAs are Government approved.

An ISA which does not meet the CAT standards might be well suited to the needs of many savers. For example, you might find that a mini cash ISA which does not meet the CAT standards because it restricts the number of withdrawals you can make, offers a better rate of interest in return.

Please read on.

Pondering Halifax's Big Rate

(Friday 4th February 2005 news story)

Hello Patients.
You might be aware of a big, juicy rate appearing in the mini-cash ISA section of the Latest Rates page, lately. It's from high street heavyweights Halifax and is a fat 5.7%. The drawbacks are that the rate is fixed and fixed for a tediously long 5 years, with no access to your money or the interest until the end of the term. Also, the minimum investment is £3,000, unfortunately.

The question is... if you invest, will 5.7% still be a good rate in 5 year's time? Interest rates have notched up a little over the last year from their lowest level in 30 years and some expect rates to continue their upward trend. But some of the factors that prompt the bank of England to raise rates have reversed recently: Consumer spending since before Christmas has disappointed shopkeepers, house prices have started to drop a little in some parts of Britain. Conversely, consumer debt is still at record levels. So, as ever, it's a gamble.

Over five years, forecasting base rate movements is virtually impossible. Over the last ten years, mortgage rates went down from about 7%, up a little, down again, up once more, before plunging, over a couple of years, to the very low levels recently witnessed, with a few quarter-point rises in the last year to their current level of about 6.5%. Looking at the extreme possibilities, a continuing retreat for property prices coupled with sluggish UK economic growth, poor consumer demand, and increased personal taxation to balance the goverment's books would all conspire to force the Bank to pull it's base rate back down. On the other hand, continued consumer borrowing, inflated house prices, a bourgeoning economy and a general feel-good factor might well mean higher rates. Not easy is it?

When choosing an account like a mini-cash ISA, which, of-course, offers reasonably good rates but with the bonus of being tax-free, think always of the long-term performance of the account provider, especially over 5-years in this context. Consider too, the ease with which the account funds can be transferred to a better account with a better rate. Think in terms of being in the top half of all the rates in this sector rather than "The best one".

We'll never promote a company's products on this site, however, we were surprised recently at how consistent the Nationwide Building Society has been over the last three years, as reported by a respected newspaper, in all savings sectors. These things will change, though, so the message is, "read those newspapers".
...Oh, and keep visiting the Surgery.

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