In this article I will explain how an ISA could help you become a millionaire.
What does ISA stand for?
Individual Savings Account.
As of April 6th 2008 the rules for your ISA have changed for the better so let me explain why.
ISA's were originally split into two components referred to as Maxi and Mini ISAs which confused a lot of people. Let me expand on this for you just in case you still hear people talking about Maxi and Mini ISAs.
Maxi ISA – Allowed you to invest up to £7,000 in stocks and shares, of which up to £3,000 could be placed into cash. Your total contribution in a single tax year could not exceed £7,000.
Mini
ISA – Allowed you to invest up to £4,000 in a Mini Stocks and Shares ISA or up to £3,000 in a Mini Cash ISA. You could not have both cash and shares, it was either one or the other.
The good news is that this has now changed.
The Maxi and Mini labels have gone and the total investment limit rises to £7,200.
Cash can be up to £3,600 of this, leaving up to another £3,600 available for stocks and shares. The new rule is that you can move funds held within a cash Isa into stocks and shares, however, you can’t do this the other way around. This is something that hasn’t been possible before so it really is a major benefit.
UPDATE: As of 6th April 2010 the ISA limit rises to £10,200 with up to £5,100 in cash. If you will be 50 or over on 5th April 2010 you can actually take advantage of these new rules from 6th Ocotber 2009.
Many people get confused as to what an ISA is especially new investors.
Let me explain…
It is possible to shelter various kinds of investment from capital gains tax (CGT) or income tax using an ISA. A lot of people look at an ISA as a kind of savings account (not helped by the fact that it’s called a savings account). In its simplest terms, an ISA is a wrapper around your money or asset that shields it from the taxman.
Any gains you make on that asset are shielded from the tax man and you don’t need to declare your gains either.
Basically, you could make millions of pounds and it would all be tax free.
How would you like to knowing that all that money is yours? - Every last penny!
If you are still a little confused by what an ISA is here is my explanation in its simplest terms:
Think of a brand new mobile phone which is sealed in a box. The phone is your investment; the box is the ISA.
Just as the box protects the phone from being damaged, the ISA protects your money from the dreaded tax man.
I’m sure you get the idea!
The government allow numerous types of assets to be included in ISAs. These include cash, gilts (government issued bond), life assurance policies, shares and investment funds.
If you are considering buying shares using your ISA allowance then my suggestion would be to consider a self-select ISA where you get the freedom to make your own investment decisions. My two recommendations for setting up your ISA are Fidelity Investments or Hargreaves Lansdown.
Just before I go I thought I better mention PEP’s.
PEP stands for Personal Equity Plan. A PEP is basically the tax incentive used prior to ISA’s. It is no longer possible to take out a PEP as the ISA has taken its place.
