COMMENT
Savers And Investors Need ISAs!

If you're a saver or investor and you don't have at least one Individual Savings Account (ISA), then you're missing a trick.

Note that an ISA isn't an investment – it's simply a wrapper that shelters other investments from the taxman's greedy mitts. You can tuck away most mainstream investments inside an ISA, such as cash, bonds, shares, unit trusts and OEICs.

There are different types of ISAs – known as maxi- and mini-ISAs – to meet different people's needs:

• For example, ultra-cautious folk can put up to £3,000 into a cash mini-ISA each tax year, which is a deposit account that pays tax-free interest, usually at market-beating rates.
• Someone wishing to balance their risk could open a cash mini-ISA plus a shares mini-ISA, putting £3,000 a year into each.
• Keen stock-market investors could open a shares maxi-ISA each tax year, dropping up to £7,000 into it.

However, shares ISAs have come under attack from critics, who argue that they have lost their shine, thanks to the removal of one tax incentive. However, I disagree – and here are eight reasons why:

1. Cash mini-ISAs are ideal for most savers. Where else can you earn tax-free interest of up to 5.4% a year on deposit? What's more, this income doesn't have to be declared to the taxman, which is a bonus!

2. A mini- or maxi-ISA stuffed with fixed-interest bonds (or a holding in a bond fund) is an ideal product for investors seeking a high income. Although this income is paid net of a 20% tax credit, ISA managers can reclaim this money. This makes, say, a 5% annual return worth 6.25% (before management charges).

3. If you are one of the UK's 3.4 million higher-rate taxpayers, an ISA will prevent you paying extra tax on the dividends that you receive from shares and stock-market funds. From a gross dividend of, say, £100, you would receive £90 inside an ISA (after a 10% tax credit has been deducted). Outside of an ISA, you'd end up with £67.50 after coughing up an extra 22.5% in income tax. So, putting dividend-paying shares or funds inside of an ISA means that you hang on to an extra 22½p in the pound.

4. Any gains made within an ISA are not liable to Capital Gains Tax. Note that no-one has to pay CGT on gains of up to £8,200 in the 2004/05 tax year (£8,500 in 2005/06). Then again, about 170,000 individuals and trusts will pay some CGT this tax year. Anyone holding sizeable investments for long-term capital growth should certainly shelter as much of these assets as possible inside an ISA.

5. Income from ISAs does not affect your entitlement to tax credits, such as the Working Tax Credit and the Child Tax Credit. As nine out of ten families are entitled to tax credits, this is a major plus for parents. Learn more about both of these credits here.

6. People who are 65 or over receive a higher personal tax allowance than the under-65s. However, this allowance is reduced when their annual income exceeds £18,900, which is the current age-allowance limit. Happily, income paid by ISAs does not affect the age allowance, which makes ISAs attractive to older savers and investors.

7. All gains made and income received inside ISAs are free of tax, so these sums don't have to be revealed to the taxman. This saves time when it comes to completing the dreaded tax return (one year, mine took ten hours!).

8. The final – and perhaps most compelling - reason for holding investments in ISAs is that many ISA managers don't charge extra fees or penalties for sheltering assets inside ISAs. So, if ISA wrappers cost you nothing, yet offer so many substantial benefits, you'd be mad not to use them!

More: Visit our ISA centre | A cheap, simple, flexible investment.

Many thanks to Chartwell Investment Management for inspiring this article.