How Isa changes will affect you

Justin Modray at independent financial adviser BestInvest said: "The proposed changes suggest ISAs will become a permanent fixture. This is good news for savers because it gives them a realistic opportunity of building a worthwhile ISA pot to provide tax-free income later in life.

"There's no guarantee that future governments won't meddle with things, but hopefully they will have the sense to ensure continuity with the current proposals.

Modray says one key issue the Government needs to address is the ability to switch from equities into cash once savers reach retirement.

He says: "It's common for savers to invest in stock markets when they are younger and reduce risk by switching towards cash as they get older, something the current proposals don't appear to allow."

There have also been calls for the Chancellor, Gordon Brown, to raise the amounts savers can put into Isas.

The £7,000 annual limit has remained unchanged since Isas were introduced in 1999. Had the ceiling risen in line with inflation, investors would now be able to save £8,318 a year tax-free.

Under personal equity plans (Peps), which were replaced by Isas, savers could invest £9,000 each year. They could save the same amount over five years into a tax-exempt special savings account (Tessa).

The latest changes are intended to give more flexibility to Isa savers and to encourage wider ownership of shares. But cash Isa holders who are inexperienced stock market investors should be wary.

Modray adds: "The key issue is that you must be comfortable taking some risk when switching into equities, as it seems the proposed rules won't allow you to switch back into cash if you change your mind.

Racy markets

"Equities also vary in risk quite significantly, so it's vital to understand just how much risk you are taking when you buy shares or an investment fund.

"On the one hand you could buy a lower risk but relatively dull fund that invests in corporate bonds issued by large companies. Or, you could buy a fund that invests in racy markets such Latin America but risk losing your shirt.

"In practice, it is sensible to hold a range of funds covering a variety of areas including UK equities, overseas equities, corporate bonds, commercial property and commodities. If that sounds rather complicated then you could buy a single fund that invests across all these areas. While it's not as flexible, it does keep things simple."

The new rules, in brief

• £3,000 a year can be invested into cash Isa
• £7,000 a year can be invested in an equity (stocks and shares) Isa
• Insurance component scrapped
• Cash accrued from cash mini Isa can transferred to shares Isa. Savers who do this can still put their yearly £7,000 allowance into a shares Isa
• New rules come into effect from April 6, 2008.