Tax- Free saving: Cut through the confusion

You can get much more for your money investing in a maxi ISA, writes Harvey Jones

Everybody understood PEPs. They allowed you to invest tax-free in stocks and shares, simple as that. Their replacement, the individual savings account (ISA), is not so simple. ISAs come in two forms, the maxi and the mini ISA, each of which allows you to invest differing amounts in cash and life insurance as well as the stock market. The result: millions of confused investors.

If you hanker for the old days then you should ignore everything about the new system except the phrase maxi ISA. This is a PEP in all but name, since it allows you to invest your full annual pounds 7,000 limit (which falls to pounds 5,000 next year) in stocks and shares and take gains free of tax.

Brian Dennehy, an independent financial adviser, says most investors should take out a stocks-and-shares maxi ISA, as shares and corporate bonds provide better growth over the longer term than cash savings.

There will be a huge choice of maxi ISAs. The vast majority of fund managers who produced PEPs, from big names such as Jupiter, Fidelity, Newton and Gartmore to much smaller funds, will be offering almost identical products. So if you have a few favourites, you know where to go.

Mr Dennehy says that as stock markets are volatile, cautious investors should consider ISAs that guarantee your investment won't fall below a certain level, no matter how far the markets drop. He recommends the Scottish Widows Safety Plus and Morgan Grenfell All-Weather Equity funds.

Mr Dennehy says investors willing to accept a medium level of risk should consider the Newton Income ISA, while the more daring should look further afield. ISAs have been given greater freedom to invest outside the UK and Europe than PEPs and he says both Japan and central Europe offer good, if risky, growth prospects. He recommends buying the shares through a Save & Prosper ISA.

Mike O'Shea, joint managing director with Premier Asset Management, sees great opportunities for growth in smaller firms in the UK and US. "If you are feeling particularly brave and fancy a flutter in the US, I would recommend Scottish Equitable US Smaller Companies Fund and the Threadneedle North American Smaller Companies Growth Fund."

Patrick Connelly, director of Chartwell Investment Management, says many investors wrongly neglect the investment-trust ISA. "These are not pushed by financial advisers as much as unit trusts because there is no commission, but if you look at their five- or 10-year performance it is comparable. I would recommend Foreign & Colonial or the Alliance Trust."

Another option that will prove popular is tracker funds that follow the index. It also outperforms the vast majority of actively managed funds.

Aberdeen Unit Trusts Managers, 0345 886 6666; Alliance Trust, 01382 201900; Foreign & Colonial, 0800 136420; M&G, 0800 390390; Newton, 0800 614330; the Chartwell ISA guide is free on 01225 321711.