“ISA blindness” means many could lose out on tax advantages

Confusion about Individual Savings Accounts (ISAs) and their benefits is preventing many people from making the most of their annual tax-free savings allowance, according to research from FTSE 100 life and pensions company Friends Provident.

Its survey of more than 1,500 people – which was conducted by online research house 72 Point on behalf of Friends Provident – found a serious lack of awareness about ISAs and their benefits:

More than two fifths (42%) did not know what the initials ISA stood for
More than one in six (17%) did not know why it was worth investing in one
Just 39% knew the maximum amount they were allowed to invest in a maxi-ISA every tax year.

A quarter of people (25%), meanwhile, said that they felt ISAs were too complicated, while more than a fifth (22%) admitted to being put off investing in an ISA as a result. The 26-30 year old age group was most affected by this, with 27% saying they had been turned off ISAs because they believed they were too complicated.

When asked about their intentions for this tax year, only 6% said they definitely would use their full ISA allowance by the end of this tax year. Nearly two thirds of people (61%) said they would be unlikely to or definitely would not use their full maxi ISA allowance.

For the next tax year, just over a quarter (26%) said they planned to invest in an ISA, while over two fifths (41%) said they would not.

The findings come just months after the Treasury announced plans to simplify the ISA regime by removing the distinction between maxi and mini ISAs. People will also be able to transfer past tax year cash ISAs into stocks and shares ISAs without this affecting their current annual allowance. These reforms will come into effect from April 6th 2008.

Christine Foyster, head of wealth management marketing at Friends Provident, said: “Our findings show that a significant number of people have a blind spot when it comes to ISAs, and are either confused by the different types of ISA on offer, or not aware of the benefits of investing in one. This is surprising given the fact they have been around since 1999.

“Using the ISA allowance is easy, with a range of options. Not having one means customers are not making the most of the tax allowance.”

To help combat ‘ISA blindness’, Friends Provident has put together five key things you should know about ISAs:

1. You can invest up to £7,000 in tax-free savings: ISAs are often referred to as a “tax wrapper” which goes around your savings, protecting them from certain taxes. They can be made up of a combination of stocks and shares and cash, allowing every person over 18 in the UK to invest up to £7,000 tax-free in any tax year. People between 16 and 18, meanwhile, can invest up to £3,000 in a cash ISA only.

2. You can choose a mini or a maxi ISA: The main difference is that a mini ISA allows you to have a different manager or provider for the stocks and shares component and the cash component. You can invest up to £3,000 in a cash mini ISA and up to £4,000 in a stocks and shares mini ISA. A maxi ISA allows you to invest £7,000, of which up to £3,000 may be in cash. Some providers may not offer the cash component.

3. You can choose to invest ethically: You can invest in ethical funds as part of your ISA – in the Friends Provident survey, just 35% were aware of this. With a FRIENDS® ISA you have access to Stewardship ethical funds.

4. You can transfer your ISAs without losing your allowance: you can transfer your existing stocks and shares ISA of any value into a FRIENDS® ISA without losing your tax advantages for the current year. The transferred ISA could be from the current tax year or from previous tax years. Prior to any transfer, check whether your current manager has any exit charges or penalties.

5. ISAs are here to stay: In late 2006, the Treasury confirmed that ISAs will become a permanent savings option for UK investors.

TheFRIENDS® ISA is a stocks and shares only ISA, which is available in both mini and maxi versions. This means you can invest £4,000 in a mini ISA, or between £4,000 and £7,000 in a maxi ISA. There are more than 80 funds available to invest in, depending on your investment objectives and risk levels. To invest in the FRIENDS® ISA you must be a UK resident aged 18 to 89.

The value of the FRIENDS® ISA is not guaranteed and can go up and down depending on investment performance. You could get back less than you’ve paid in. Tax rules may change.

For more information about the FRIENDS® ISA, call 0800 000 080. Please note Friends Provident’s own financial advisers are not able to offer investment advice about the FRIENDS® ISA. If you have any doubts whether the FRIENDS® ISA is suitable for your needs, you should contact a financial adviser for advice on investments.