Best Isa - Your Guide To The Best ISA's On The Market

best maxi isa

best isa explained Let's start by looking at the Maxi isa which may or may not be the best isa for you, depending on your personal circumstances. Now the name of this isa is about to change, however there will be many similarities so for those of you who already hold these, please don't worry as I will explain the changes in detail shortly. Now before we start to look in detail at each form of isa, it is important to realise that all isa's are inter-dependent with one another.

In other words if you have the maximum holding in one in a particular tax year, you cannot open another holding. In addition the types of holding within the isa will also affect the mix of isa's that you can buy in a particular year - confused - don't worry - I hope the following will make things a little clearer.

best isas - maxi isa explained

So, what exactly can you invest in an isa? In simple terms you have three choices as follows :

1. Cash

2. Stocks and shares

3. Life assurance

Now, a maxi isa contains two components and allows you to invest in a mixture of cash, and stocks or shares. This is the reason it is called a 'maxi isa' and this is a key difference from the mini isa which only has one element. The Maxi isa therefore gives you two options.

Firstly you can invest the full £7,000 allowance in stocks and shares which can be in any country anywhere in the world, provided that country has a recognised stock exchange. Now the investment can be in individual shares or bonds which you select yourself, but this can be risky. If you understand the risks involved, and have a detailed knowledge of the markets then choosing your own stocks or shares is fine, provided you understand the risks. For less experienced investors or novice traders, I would suggest buying a collective investment such as a unit or investment trust or corporate bond in order to spread the risk. In essence these provide a 'basket' of stocks or shares in different markets and sectors, so your risk is spread across several companies.

Now the second option with a maxi isa is that you can spread your investment between the two elements ( something you cannot do with a mini isa) of cash and stocks and shares, but you need to be aware of the fact that the entire package has to come from one company. In other words you cannot have part of the maxi with one provider and the second part with another. Now there are limits on the mix of the two elements you can hold which are as follows :

Option One :    All £7,000 allowance in stocks and shares

Option Two:     A maximum of £3,000 in cash and the balance in stocks and shares

As we can see from the above, the maximum you can hold in cash in a maxi isa is £3,000, but you have the option to have all £7,000 invested in the stock market. So for example if you wanted to invest £1,500 in cash, and the remainder in stocks ( £5,500) then this is fine under the current rules. You could not however have the reverse as this would exceed the maximum cash allowed within the isa of £3,000.

In practice, most people who are considering a maxi isa, are generally more interested in the stocks and shares component. Market statistics suggest that 98% of maxi isa's are invested wholly in the stocks and shares element. In 2005/2006, approximately 1.5million maxi isa's were opened with an average of £4,500 in each in stocks or shares.

maxi isa risks

Clearly from the survey by the FSA which I have already mentioned, many, many, people ( 40% according to the report) have no idea that the value of a maxi isa will vary as to whether the stock market is performing well or badly. At the risk of being boring, I will restate it here - the value of your isa can rise as well a fall, and you may not actually get back your original investment. Clearly you should be made aware of this when speaking to an advisor, but I suspect that many people are not, and only find out after the value of the isa has declined. When looking at the maxi isa as an investment product, it is vital that you take a long term view of the market which should be at least five years, and ideally longer. Because the value of investments can go down as well as up, you need to give the investments time to recover if they have suffered a loss as they are NOT guaranteed, so you may get back less than you invested. I hope I have made the point!

Now one final point which is this - you can only open one isa product per tax year. So, if you open a maxi isa in the tax year, you cannot them open a mini isa later in the same year ( and visa versa). So please think carefully before you open your isa. So is a maxi isa the best isa for you? I would suggest that in simple terms you should consider the following as the key decision making criteria :

1. Consider your view of risk -  are you comfortable with investments which both fall and rise in value

2. If you have a detailed knowledge of the stock market or individual stocks and shares

3. If you can take a long term view of at least five years

4. If you can tie up your finance for a long period

OK, I think that's about it on the maxi isa which I hope has given you a feel for the product and what you should think about when considering this for your tax free investing. Whether it is the best isa for you will depend on your personal circumstances and also considering the above points before you dive in. Now let's look at the next isa, the mini isa which could be an alternative for the best isa for you.

Best ISA - next page