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ISA 2011/12

If you're not making the most of your whole tax free allowance you're missing out. We explain how to get started with Investment ISAs if you've never dabbled before.

Sometimes referred to as a ‘Stocks and Shares ISA’, an Investment ISA allows you to use your tax free allowance in stocks and shares as opposed to straight-forward cash. Investing stocks and shares under an ‘ISA wrapper’ has the added benefit of protecting you from paying Capital Gains tax on your profits.

How much can I invest? The annual tax-free allowance for Investment ISAs is £10,200 less any amount invested in a Cash ISA (this can be up to £5,200). This increased from £7,200 total, £3,600 cash in October 2009 for savers over 50 and 6th April 2010 for all other savers.

How do I invest? Unlike Cash ISAs, which are simply tax free savings accounts, you will usually require the services of an ISA manager, a stockbroker or the stockbroking division of one of the big high street banks when youinvest in an Investment ISA. You can only open one Investment ISA with one ISA manager per tax year. However, you are allowed to hold different Investment ISAs with different ISA Managers from different tax years. It's important to remember that there is an element of risk whenever you are dealing with stocks and shares and there is no guarantee of returns as with a Cash ISA.

What different types of Investment ISAs are there? Investment ISAs can be broadly categorised into two different varieties: The most popular type of Investment ISA, involves making what’s known as a ‘collective investment’. This is where your money is pooled with others and used to invest in a selection of different shares and sectors that are typically picked on your behalf by an experienced fund manager. As such this kind of Investment ISA tends to be a better choice for first-time or less experienced investors. One of the main benefits of spreading your money between a number of different companies and sectors is that you are mitigating the risk to your capital should one of your investments perform poorly. The alternative is a Self-select ISA where you choose exactly where your money is invested yourself. Your investment is then managed by an execution only stockbroker who simply acts on your instructions as opposed to offering advice.  Alternatively you can manage your shares yourself via a fund supermarket. This type of ISA tends to be better for more experienced investors who have invested in stocks and shares before.

What type of investments can you make? There are a huge number of different types of investments you can make under your ‘ISA wrapper’ as long as they meet the criteria of the ISA regulations e.g. only investing in the shares of a company listed on a ‘recognised stock exchange’ like New York or London. It is your ISA manager’s responsibility to ensure that all investments meet the requirements of the ISA regulations, so any fund offered by an ISA manager should automatically be ISA qualifying. Some typical examples of the different kinds of investments you can make are: Gilts & bonds.  Individual shares & corporate bonds issued by companies listed on recognised stock exchange.  Unit trusts, investment trusts and open ended investment companies.  Exchange traded funds.

Can you make withdrawals? It is possible to sell shares within your Investment ISA and withdraw your money at any time. However, you will need to bear in mind that you won’t be able to reinvest this amount again tax-free during the same tax year. Any profit you make from your Investment ISA is treated in the same way - meaning that you can’t re-invest it during the same tax year.

Can you switch an investment ISA? If you are not happy with the way your fund is performing, then it is possible to switch your Investment ISA to a different fund or ISA Manager. However, be careful not to simply withdraw your money and close the account yourself. This will simply result in you losing your entire tax-free allowance as you are only allowed to invest with a single ISA Manager each tax year. Instead you should arrange the transfer with your new ISA manager who will carry out the move on your behalf. It is possible that you may have to pay a charge for transferring your Investment ISA so always check the details carefully before you act.

Are there any charges? The charges applied to Investment ISAs vary from provider to provider which is why it's really important to familiarise yourself with the fees levied before you apply.  Examples of the kind of charges usually associated with Investment ISAs are: one-off set-up fees, transaction fees, transfer in & transfer out fees and annual charges. You should also be aware that you will be charged Stamp Duty of 0.5% on any shares or funds that you purchase over £1,000.

Are they better than Cash ISAs? Historically, Investment ISAs have offered a better return over the long-term than their cash equivalents. However, this must be weighed up carefully against the greater level of risk that your investment is exposed too, as well as considering carefully what it is you require from your savings and investments. An Investment ISA could also be a better proposition for those in a higher tax bracket as they would otherwise have to pay tax on any share dividends. Even if you currently find yourself in a lower tax bracket, an Investment ISA might be worth considering if you suspect that you may be up for a pay-rise in the near future. The fact that you can move money from a Cash to an Investment ISA (but not the other way round) can be exploited to prevent you placing all your eggs in one basket. If you are new to investing in stocks and shares then - rather than exposing yourself to a higher risk from the start with an Investment ISA - you could first choose to build up a healthy cash base with a Cash ISA and then invest your profits in an Investment ISA at a later date. Alternatively, you also have the option of simply running both concurrently. You should also remember that whereas you can only invest a maximum of £5,100 in a Cash ISA, you can invest your entire allowance in an Investment ISA (or any combination that doesn’t exceed either your cash or total tax-free allowance).

What are the risks? Unfortunately, wherever there is the potential for greater returns on an investment, there also tends to be a greater element of risk. This is the case with Investment ISAs as, by their nature, the value of stocks and shares can go down as well as up. Exactly how much risk you are exposed to will depend upon the risk profile of your investment, how much money you choose to invest and how much of a risk you are personally prepared to take. To take out an Investment ISA, you should be looking to invest in the long, rather than short-term (say around 5 years). Most ISA Managers would advise that the longer you can leave your money in an Investment ISA the better, as this allows the various peaks and troughs of the stock market to even out and offer a more consistent return. To lessen the risk, it could be a wise move to spread your investments between a number of different fund companies, funds or sectors - rather than putting everything into a single company’s shares. If you are new to the world of stocks and shares or even if there is anything you are unsure of with regards to Investment ISAs, it is always worth seeking the advice of an independent financial advisor.

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