Forward Diary

How to Invest in ISAs

With a choice of the Cash or Stocks and Shares route, ISAs provide a flexible way to manage your savings and investments Cash ISAs are pretty straightforward, one might think. Bank and building society deposits, right? Certainly they can include cash deposited in bank and building society accounts and these account for most of the money invested. But there’s also an assortment of other savings and investments that can be included: • National Savings & Investments products that are specially designed for ISAs (but not other NS&I products such as the Investment Account, Savings Certificates or Pensioners’ Guaranteed Income Bonds).   • Alternative finance arrangements, such as Sharia- compliant products.   • Shares in companies and collective investment schemes that fail to meet the qualifying conditions* for Stocks and Shares ISAs.   • Life insurance policies that fail to meet the qualifying conditions for a Stocks and Shares ISA.   • Stakeholder cash products.   • Stakeholder medium-term products that fail to 
meet the qualifying conditions for a Stocks and 
Shares ISA.   • Structured deposits.   Stocks and Shares ISAs can include: • Shares and corporate bonds issued by companies officially listed on a recognised stock exchange anywhere in the world. • Gilt-edged securities – that is, UK government bonds – and similar securities issued by governments of other countries in the European Economic Area and ‘strips’ or zero- coupon bonds. • Units or shares in funds authorised by the Financial Services Authority, such as unit trusts or OEICs (Open Ended Investment Companies). • Shares and securities in investment trusts or companies. • Units or shares in UCITS** funds – that is, funds based in the European Union that are similar to authorised unit trusts and OEICs. • Units or shares in non-UCITS schemes authorised by the FSA for sale to retail investors in the UK. • Any shares which have been transferred from an HMRC-approved employee share scheme, such as a SAYE share option scheme or Share Incentive Plan. • Qualifying life insurance policies . • Stakeholder medium-term products. • ETFs (Exchange Traded Funds). * Under the so called ‘5% test’, there is a requirement that within five years of the date of investment, the investor should not be ‘certain or near certain’ of the return of 95% or more of the initial investment **Undertakings for Collective Investment in Transferable Securities. Some points to bear in mind: • With funds, there are no geographic investment limitations: you could, for example, invest all your allowance in a fund invested in Japanese or Brazilian shares, as long as it falls within one of the categories listed above. • Investments that do not qualify for inclusion in an ISA include futures, options, CFDs (con- tracts for difference), warrants and covered war- rants and physical commodities. • Government and corporate bonds must be at least five years away from redemption to qualify for inclusion. The interest rate must be fixed – i.e. not floating or variable. • Cash may be held in a Stocks and Shares ISA but only if it’s to invest in qualifying investments. This includes cash subscriptions, interest and dividends, plus proceeds from the sale of investments that have not yet been reinvested. There is no income tax to pay on interest from cash held in the account and it does not have to be declared on your tax return, but the ISA manager must deduct a flat 20% before crediting it. AIM and PLUS Shares listed exclusively on AIM cannot be included in an ISA. However, AIM-listed stocks that are also listed on a recognised exchange, for example NASDAQ or Australia’s ASX, may qualify for inclusion. Companies on the PLUS-listed market are eligible for ISA investment as, unlike AIM, the market is classed as a recognized stock exchange by the FSA. Financial Secretary to the Treasury, Mark Hoban, gave a strong indication last October that AIM shares would continue to be out of bounds. Hoban said his concern was that ‘by extending to include AIM companies, you are at risk of undermining the strength of the ISA brand, and that might act as a barrier in future to people putting money into them’ – an argument that took a fair amount of stick from commentators at the time. Life insurance policies You can include both ‘unit-linked’
and ‘with profits’ types of life 
insurance policy in an ISA but
they must meet a number of conditions to qualify. ISA managers offering life insurance should be able to give you details of the policies, which may be the manager’s own or a range of policies from different insurers. If you have an ISA life insurance policy, the insurer does not have to pay tax on income and capital gains on investments and you do not have to pay any tax when the policy pays out. According to HMRC, a policy taken out before April 6 2004 is a qualifying investment for a Stocks and Shares ISA. After that date, a policy will qualify unless it guarantees to return 95% or more of the money initially invested within five years.  If it does contain such a guarantee, it will qualify for a Cash ISA. This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions.

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