To ISA or not?

Earlier we said that the preferred investment route is a tracker, probably in an ISA. Let's look at the latter half of that equation in a little more detail.

The main benefit of an ISA is of course the tax relief. These days the income tax relief you get on any dividends paid out is nothing to write home about and it will disappear completely in a few years' time. The key attraction of an ISA is that it protects you from Capital Gains Tax (CGT).

In actual fact not that many people pay CGT. That's because they take advantage of ISAs and its predecessor, the PEP. You only pay CGT on gains over a certain amount, £7,700 for the 2002/3 tax year. That may sound a lot if you are only investing £25 a month. But if you intend to invest for the long-term it's something you need to consider. It's surprising how the gains add up over the years. Taking out an ISA is almost like insurance against paying CGT. You may not need it but it's nice to have it just in case.

In addition, particularly where trackers are concerned, holding them within an ISA does not always mean extra charges. Therefore we might as well go the ISA route and get our insurance against tax for free. But if there are extra charges within an ISA then you may have to do some sums to estimate if it is worth the effort. The more you put in and the longer you intend to invest the more likely it is that an ISA makes sense.

Find out more about ISAs