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PEPs and ISAs - the new rules

tax efficient savings

20 odd years after the introduction of Personal Equity Plans (PEPs) by a Conservative government, and nine years after Labour replaced them with Individual Savings Accounts (ISAs), we are once more facing major changes to the rules.

What were the old rules?

With PEPs, you could invest up to £6,000 a year in shares or funds, with the proceeds being paid free of income and capital gains tax. An additional £3,000 could be invested in a single-company PEP, which held shares in only one company. The Major government introduced Tax-Exempt Special Savings Accounts (TESSAs) in 1991, which allowed up to £9,000 'cash' to be saved tax-free over a five year term.

The ISA regime, which replaced both PEPs and TESSAs, was less generous and inevitably more complicated. Only £7,000 a year could be invested, with a maximum of £3,000 in cash. There were "mini" and "maxi" ISAs, and if you had a maxi-ISA which allowed the full £7,000 to be held in stocks and shares (including funds), you could not take out a mini-ISA in the same tax year.

How do the new rules differ?
From the start of the new tax year on 6 April 2008, the rules are going to change substantially. The mini and maxi distinctions have been eliminated and the overall contribution limit raised to £7,200.

Up to £3,600 of the £7,200 allowance can be held in a cash ISA, with any remaining allowance (i.e. up to the full £7,200 if a cash ISA is not used) available to invest with either the same or a different provider in a stocks and shares ISA.

Under the new rules, mini cash ISAs, TESSA-only ISAs (TOISAs) and the cash components of maxi-ISAs will become cash ISAs, while mini stocks and shares ISAs and the stocks and shares components of maxi-ISAs will become stocks and shares ISAs.

What happens to my PEPs?
Since the demise of PEPs in 1999, no new subscriptions have been allowed, but rollover vehicles have been available for PEP transfers. From 6 April, all PEP investments will be re-badged as stocks and shares ISAs, and investors will be able to continue to contribute to them, taking advantage of the wider range of permitted investments in ISAs, so long as they are not contributing to another stocks and shares ISA in the same tax year.

Your existing PEPs can, if you wish, be merged with your existing ISAs. If there is uninvested cash in the PEP, this will in future be taxed at 20%, as has always been the case with stocks and shares ISAs.

Can't I invest that cash?
Money can be transferred from a cash ISA to a stocks and shares ISA under the new rules. You can transfer some or all of the money you have saved in cash ISAs in previous tax years to your stocks and shares ISA without losing the current tax year's allowance. In the current tax year you can transfer all, but not part, of the cash saved. However, you will be able to make further subscriptions to your cash ISA that exceed the £3,600 limit, providing your ISA subscriptions for the year remain within the £7,200 limit. For example, if you had saved £1,000 and transferred it to your stocks and shares ISA, you could put another £3,600 into your cash ISA as well as a further £2,600 into your stocks and shares ISA.

You must complete the appropriate transfer forms and instruct your ISA provider to make the transfer: If you simply withdraw funds from your cash ISA to invest in your stocks and shares ISA, this will count against your annual allowance.

Can I transfer proceeds from my stocks and shares ISA into my cash ISA?
No. As the holdings in a stocks and shares ISA are free from capital gains tax, it would in theory be possible to sell them and reinvest the proceeds in a cash ISA which is why it is not permitted.

Check out your existing funds
Before using your tax free ISA allowance for the 07-08 year, which you must do before 5 April to benefit, it's a good idea to check out how well or badly your existing funds are performing. You can do this very simply by registering your funds with Moneyspider.com and, by inserting the promotional code MA15, you will be entitled to £20 cashback when your registration is confirmed. You won't have to pay a penny and your funds don't move or change in any way.

(The above article is based on the author's understanding of the new rules and investors are advised to take their own professional advice.)


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