TESSA Only ISAs (TOISAs) - A Guide

What's happened to TESSA only ISAs (TOISAs); How TOISAs have become Cash ISAs and what your ISA options are now for your ex-TOISA savings.

• What was a TOISA?
• Why have TOISAs changed?
• What can I do with my ex-TOISA Cash ISA?
• What about stock market linked TOISAs?
• Can I transfer my account to another ISA provider?

What was a TOISA?

A TESSA Only ISA (TOISA) was an Individual Savings Account (ISA) into which all or some of the original capital subscribed, up to the maximum of £9,000, from a mature Tax Efficient Special Savings Account (TESSA) has been invested.

TESSAs were introduced in 1991, allowing investors to save up to £9,000 spread over five years. Provided the capital was left in the account for the full term, the capital could be rolled over into a new TESSA and the interest retained by the investor completely free of tax. TESSAs were withdrawn following the introduction of the Individual Savings Account.

However, TESSAs then in existence were allowed to run to maturity (the last matured in April 2004) and the TOISA was created to give investors the ability to decide to re-invest their accumulated capital in a tax-efficient account up to six months after their TESSA had matured.

Those people who rolled the capital of a mature TESSA into a TOISA were allowed to do so without any impact on their ISA allowances. That is to say they were allowed to open a TOISA while, at the same time being able to subscribe to another form of ISA up to the maximum allowable annual investment limit.

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Why have TOISAs changed?

As of 6 April 2008, all existing TOISAs were reclassified as Cash ISAs. The move was part of an overall simplification of the Individual Savings Account rules. What it means for TOISA holders is greater flexibility for their tax-sheltered savings.

The reclassification of TOISAs does not affect your annual ISA investment limit, you may still invest up to £3,600 in a Cash ISA and up to a maximum of £7,200 in a Stocks and Shares ISA. However, do remember that any new money saved in a Cash ISA will reduce what you may invest in a Stocks and Shares ISA by an equivalent amount.

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What can I do with my ex-TOISA Cash ISA?

With TOISA investments reclassified as Cash ISAs, your investments that were held within a TOISA are subject to the Cash ISA rules. This means you may transfer all or part of your ex-TOISA savings into a Stocks and Shares ISA without affecting your annual ISA allowance.

Although you may transfer such funds in a Cash ISA into a Stocks and Shares ISA, you may NOT transfer investments in a Stocks and Shares ISA into a Cash ISA.

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What about stock market linked TOISAs?

Many savers invested their TOISA funds in stock market linked TOISAs, rather than cash TOISA savings accounts. These stock market linked TOISAs also offered 100% security of capital, unlike a standard stocks and shares ISA, where the value of your capital investment is at risk. They were required to guarantee to return the original investment at the end of the five-year term, regardless of what happened to the stock market.

Typically, a stock market linked TOISA offered the required 100% original capital guarantee plus a tax-exempt bonus return linked to the performance of the stock market over the stated term. If you held one of these TOISAs you may find your capital will remain locked in until the end of the originally stipulated term - this will vary from provider to provider and you will need to check with the financial institution concerned..

Investors opting for market-linked TOISAs were generally not allowed access to their capital during the five-year period and it was usually stipulated that an overall fall in the stock market index over the five year term meant that no bonus would be paid and only the original capital returned.

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Can I transfer my account to another ISA provider?

As a Cash ISA, you may be able to switch your ex-TOISA investments to another ISA provider relatively easily but you must make sure you follow the ISA rules to protect the tax-sheltered nature of your savings.

You can usually transfer simply by asking the new ISA manager to arrange the transfer. You cannot transfer your ISA by closing it and opening a new ISA with the new ISA manager. You may transfer all of the money you put into your ISA in earlier years or only some of it, if you wish. However, some managers may not allow you to transfer part of your ISA (this will be in the terms and conditions).

If you are considering switching to another ISA provider, check with your existing ISA provider first to see what, if any, costs they impose as well as checking on whether they impose a charge for the transfer itself. The important thing to do is to focus on what you want, rather than leaping at the first attractive-sounding product that comes along.

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07 April 2008 © Moneyextra.com

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