ISAs, CATs, PEPs, TESSAs and other animals.

From 6 April 1999 Individual Savings Accounts (or ISAs as they are known) have replaced both Personal Equity Plans (PEPs) and Tax Exempt Special Savings Accounts (TESSAs). Since that date you can no longer contribute to either a PEP or a TESSA, but investments in both products may be left to run alongside an ISA.

Contributions to TESSAs can continue if taken out prior to April 6 for the remainder of the five-year term. When your TESSA matures you can put the original capital of up to £9,000 into a cash ISA, on top of any money you are already putting into ISAs that year. The Government's aim is to suit all levels of savers, irrespective of their earnings. It has guaranteed that ISAs will run for at least ten years and there is an annual subscription of up to £7,000, ISAs can invest in stocks and shares, cash and life assurance.

Tax benefits are the same as for PEPs, in that there is no personal liability to tax and money invested in an ISA grows tax free. There is, however, a 20% deduction on interest from cash held in a stocks and shares element of an ISA. Dividends paid into ISAs will carry a 10% tax credit which is reclaimable for the first five years, until April 5, 2004. Dividends received after this date are not reclaimable. The treatment of PEP holdings is identical.

Maxis or Minis

Investors have a choice each financial year of either one Maxi ISA or up to three Mini ISAs.

Maxi ISA holders invest in a single manager who must provide at least the equity component, but may also offer cash and life assurance. Up to £5000 can be invested in equities this way (£7000 in 1999/2000).

Mini ISA holders may invest with separate providers, one for each component. In this way as a investor you can invest up to £3000 in equities, £1000 in cash (£3000 in 1999/2000) and £1000 in life assurance.

Clients wishing to maximise their equity content should only consider a Maxi ISA, as you could not have both a Mini and Maxi ISA in the same tax year.

A taste of the CAT

You may also have read about CAT marked ISAs. CAT stands for Charges, Access, Terms, and is a set of standards that the Government has introduced to help investors identify reasonable charges, easy access and fair terms, although significantly it does not guarantee performance.

These standards are voluntary and institutions running ISAs support the objectives. However, it is generally accepted that meeting these standards precisely could place limitations on the fund management expertise offered to investors, and most fund managers appear confident that the investment opportunities available to investment would outweigh the extra charges for their services.

PEP Talk

PEP providers have written to those clients who have regular monthly PEP saving setting out arrangements to allow you to continue regular tax-free saving through an ISA. Clients using a PEP to repay a mortgage can replace their PEP with an ISA, subject to the new maximum limits.

ISA rules stipulate that Plan Managers must provide investors with full details of the ISA and that investors must agree in writing before the ISA is opened.

Here at KMG we are committed to this important market and would be pleased to advise any client wishing to take out this type of investment for the first time, or wishing to add this investment to their existing portfolio of PEPs and TESSAs.