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New ISA rules

Are stock market-based individual savings accounts (ISAs) still a good investment, and how will last month's budget proposals affect them?

Stock market-based or equity ISAs are investment fund products. They are tax-efficient but not tax-free. Some of the equity funds they are invested in may pay 10 per cent tax on the dividends they receive and investors cannot reclaim this tax.

Otherwise, you do not pay income tax when you cash your investment and ISAs are exempt from capital gains tax (CGT).

Any profit equity ISA funds generate is normally reinvested and may lead to healthy capital growth. Or you invest in a fund designed to produce income.

In a volatile market, making monthly payments rather than paying a lump sum makes sense as in some months your payment will buy more units at a lower price, which may go up in value.

The current ISA allowance is £7,200, of which £3,600 can be in a cash (savings account) ISA and the rest in an equity scheme. Or put the lot into equities.

The budget proposed increasing these allowances. If you were 50 or older on 6 April 2009, your allowance will increase to £10,200 (a maximum of £5,100 cash or all in equities) on 6 October 2009. However, you can increase your monthly payments now if you do not exceed £7,200 by 5 October. From 6 April 2010, the new limits will apply to all age groups.

While some higher rate taxpayers might be stung by pension rules changes, ISAs are an excellent alternative to starting a pension top-up scheme. You should regard equity ISAs as five-year plus investments.

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