Isas: How Will the 2008/9 Changes Affect You?

In 1999, the government introduced Individual Savings Accounts (ISAs) for an initial period of ten years. So successful have these tax-efficient saving schemes proven - over 17 million people have invested in an ISA (double the number of people who ever invested in a Tessa or PEP) - that the government has now confirmed that ISAs will be made available indefinitely. It has also agreed several reforms to the ISA scheme that may impact your saving decisions in the 2008/9 financial year.

If you have invested in an ISA before today, or you have thought about it, you may have been a little confused by the options available to you. For example, you could opt for either one or two Mini ISAs, or one Maxi ISA. The Mini ISA enabled investors to put up to £3,000 into a cash ISA and up to £4,000 into a stocks and shares ISA (investors could choose to split these between two providers or just keep both with the one provider).You could also just choose one Mini ISA, either a cash OR stocks and shares ISA. Alternatively, a Maxi ISA would allow you to invest the full £7,000, with it all going into shares. Confused? Not surprising.

No investor could have both a Mini and a Maxi ISA, however, meaning that investment limits were capped at £7,000, no matter what option investors chose. The government has recently confirmed, however, that from 2008 onwards, not only will the ISA scheme continue indefinitely, but the model will also be simplified. The key changes are as follows:

* From 6th April 2008, the ISA limit will rise to £7,200, from the current £7,000. Up to £3,600 of this can be saved as cash and the balance, or all of the £7,200, can go into a stocks and shares ISA. The oft-confusing distinction between Mini and Maxi ISAs will be abolished, with accounts being re-designated as "cash accounts" and "stocks and shares accounts".
* Personal Equity Plans (PEPs) will cease to exist from 6th April 2008. If you hold a PEP already, you will be able to transfer the PEP into an existing or new stocks and shares ISA.
* To encourage investment in shares, you will also be able to transfer your existing cash ISAs into a stocks and shares ISA and it will not count against the year's ISA savings allowance.
* Money held in child trust fund (CTF) accounts will be able to roll over into an ISA once the child reaches 18.

These changes should make it easier for you to understand and make the most of your options, while giving you plenty more time to benefit from the ISA model for years to come. The rise to £7,200 has been welcomed by many commentators, although the possible cash ISA increase to £3,600 has in fact resulted in a fall in the amount that can be invested in stocks and shares ISAs from £4,000 to £3,600. However, observers hope that the government will further increase the ISA limit in future as the current 3% rise represents a fairly insignificant increase for nine successful years of ISA investment.

Why ISAs?
The ISA is quite simply a saving scheme that gives you significant tax savings. Any money accrued within an ISA is free of either income tax or capital gains tax - which means that you can accrue far more interest than on other tax-payable savings schemes. The cash ISA is a simple cash savings account, which works much like any other bank or building society scheme, except for also being tax free. Cash ISAs are useful for saving money to gain interest, avoid tax and have easy access to your savings at relatively short notice. The stocks and shares ISAs, however, are more suited for those who want to make a more long-term investment in the stock market. But do remember that past performance is not a guide to future returns and the value of investments and the income from them can go down as well as up.

Although April 2008 may still seem a long way away, it is never too early to look at your savings portfolio and start making some decisions about your short and long-term future. After all, in years to come, you may look at your carefully saved pot of cash and thank yourself for thinking ahead.