Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 46:  Investment wrappers  Individual Savings Accounts (ISAs)  Child Trust Funds (CTFs) 46cis

Investment “wrappers” The UK Government, like many other governments, tries to encourage its citizens to save and to own shares. These savings provide the funds for investment.  Individual Savings Accounts (ISAs)  One of the ways in which the government achieves this is to use tax incentives to make certain savings and investment products attractive to savers and investors.  These schemes are called investment “wrappers”, because they can be used to parcel up a range of different investments under the same tax incentive scheme.  These schemes wrappers are subject to strict rules imposed by HM Revenue and Customs (HMRC) which lay down o Who can invest o How much can be invested each year o When it can be invested o Which investments are permissible  Child Trust Funds (CTFs)  Pensions  Investment bonds  The types of investment wrappers are:

Why does the UK government wish to encourage saving? Although savings are a leakage from the circular flow of income (and thus reduce aggregate demand), Britons have been spending too much and saving too little  Until the 2008 recession, people in the UK were saving less than at any time in the past 40 years, according to the Office for National Statistics.  Long-term interest rates were falling, unemployment rates were low, asset prices were rising, and markets were awash with cheap credit. All of these conditions provided an incentive for households to spend and borrow rather than save. ISAs were introduced by Gordon Brown in 1999, replacing the Personal Equity Plans (PEP) and Tax Exempt Special Savings Accounts (TESSA) scheme introduced during the 1980s.  The UK average Cash ISA now stands at £7,782

Individual Savings Accounts (ISAs) An ISA is an investment wrapper provides a tax-efficient method of holding investments such as shares, deposit accounts and unit trust units  UK savers can:  save cash in an ISA and the interest will be tax- free  invest in shares or funds in an ISA - any capital growth will be tax-free and there is no further tax to pay on any dividends they receive  As at 5 th April 2008, £142bn was held in Cash ISAs and £78bn in Stocks & Shares ISAs Net ISA sales - £m Rank Oct 99 to Aug 00 7,8471 Oct 00 to Aug 01 4,8292 Oct 01 to Aug 02 2,9064 Oct 02 to Aug 03 1,4106 Oct 03 to Aug Oct 04 to Aug 05 -1,15010 Oct 05 to Aug Oct 06 to Aug Oct 07 to Aug 08 -1,72211 Oct 08 to Aug 09 2,1505 Oct 09 to Aug 10 4,6653  Firms offering investments in ISAs must be approved by HM Revenue and Customs  Approved firms can be banks, building societies and fund management companies  The approved firm is known as the “ISA manager”

Individual Savings Accounts (ISAs) ISAs are particularly attractive to higher-rate tax-payers, as their ISA-based investments are not liable to any additional income tax on interest or dividends  The ISA structure is now much simpler than it was before  Every eligible investor has an annual ISA investment allowance known as a “subscription limit”  The 2009 Budget announced an increase in the subscription limit to be phased in over two years  But restrictions still remain. For instance, savers can use the same or different ISA providers for each component o The subscription limit was raised from £7,200, of which up to £3,600 could be placed in a Cash ISA…  …to £10,200, of which up to £5,100 could be placed in a Cash ISA. This came into effect on 6 th April 2010 o But savers cannot spread their allowance for each component across more than one provider  i.e. the saver cannot keep half the cash allowance and half the stocks and shares allowance with one provider, and the other halves with another provider

Transfers to and from ISAs Rules on the transfer of sums between ISAs are not as strict as before but must be followed to the letter  Transfers of previous years’ ISAs can be whole or in part o However, current-year ISA subscriptions must be for the full amount invested  Since April 2008, savers have been able to transfer some or all of their money saved in previous years’ Cash ISA to a Stocks & Shares ISA without affecting their annual ISA investment allowance  Savers can now transfer money saved in their current year Cash ISA to a Stocks & Shares ISA. However, they must transfer all of the cash saved in the account so far o Having cleared out their Cash ISA, they can then top it up again up to the full £5,200 allowance  Although savers can transfer money from a Cash ISA into a Stock & Shares ISA, they cannot do it the other way around.  Withdrawals of any cash or investments from an ISA are permanent. Once withdrawn, they cannot be re-deposited.  Providing the receiving manager is prepared to accept it (and not all ISA providers are), a saver is allowed to transfer an existing ISA from one manager to another

Child Trust Funds (CTFs) The Child Trust Fund (CTF) has introduced by the previous government to help and encourage parents to save for their child’s future  They can carry on saving o Or they can spend the money on acquiring skills through driving lessons, or training courses etc  The intention was that when a child reaches the age of 18, they will have some money to give them a start in life as an adult.

CTFs (cont.) Different types of CTF account are available  Providers offer up to three forms of CTF account  A stake-holder account o Savings accounts are the most secure, but are the most affected by inflation o Stocks & Shares accounts offer the most growth, but the most risky o These invest in Stocks & Shares but the government has set rules to reduce risk. o When the child reaches the age of 13, the money must be moved from shares into safer investments  Other accounts are available o Ethical accounts  A savings account  A stocks and shares account o Sharia accounts

Recent changes to the CTF scheme The new Coalition government has introduced major changes to the CTF scheme  Children of low-income families will receive a further £50 instead of the £250 previously  The government has scrapped the additional payment at Year 7  Children reaching the age of 7 before the 31 st July 2010 will still get the £250 payment  The parents of any child born after 2 nd August 2010 will now receive a voucher for £50 to start a trust fund for the child, instead of the £250 previously.  The Coalition says it will introduce legislation aimed at stopping payments completely.

Child Trust Funds to be scrapped – BBC News 24 May 2010 Chief secretary to the Treasury, David Laws, said halting these payments to new- borns from the end of the year - and the top-up payments - would save £520m. Some £320m will be saved in 2010 and 2011, rising to £520m in Mr Laws said it was "deceiving" people if they were handed funds that were from borrowed money. "I know that this will be a disappointment to some parents, but we need to be honest about what we are doing," he said. "At present, the child trust fund is based on the claim that young people will build up an asset which they can use later in life. But since government payments into the scheme are essentially being funded by public borrowing, the government is also storing up debts which will have to be repaid by the same young people.“ David White, of the Children's Mutual, said he was "staggered" by the announcement. "The Child Trust Fund is the single most successful savings policy to date and this sort of short-term cut does not address the pressing need for families to save, or recognise the significant benefit to society that the Child Trust Fund will bring from 2020 as maturing funds return an anticipated £2.96bn each year to the economy," he said.