Why it's still worth investing in an Isa

Strategy: Why it's still worth investing in an Isa - at Moneyweek.co.uk - the best of the week's international financial media.

Remember Isas? "Only a few years ago it seems that having one was practically compulsory," says Saga. In the late 1990s as shares soared it was reasonable for investors to think their capital gains would outrun their capital gains allowance (currently £7,900). Using a maxi-Isa wrapper let you invest up to £7,000 a year in equities free of capital gains tax, which seemed like a dream come true. Isas looked good for income investors, too. Holders of equity Isas got a 10% dividend tax credit from the Government. If you hold shares outside an Isa, 10% of your dividend income is automatically taken in tax - but inside an Isa, it was all yours.

Not any more. Gordon Brown changed the rules and last year you stopped getting that 10% back. Now he keeps it instead. And given that the days of automatic capital gains are long gone, it's no wonder our love affair with Isas is over. The latest figures show net Isa sales were £37.4m in October, an improvement on September's figure of £23.5m, but some 83% down on the same time last year, and a far cry from the £900m a month at the height of the bubble in 2000. But have Isas really outlived their usefulness? Absolutely not, says Alison Steed in The Daily Telegraph. There are still advantages. In November, the Chancellor announced that Isa allowances will not now be cut until 2009 at the earliest. For the foreseeable future, therefore, you can still invest up to £7,000 a year free of capital gains tax. And although the odds of big gains from your share holdings have fallen, in the long term you will be grateful for the concession.

If you're a higher-rate taxpayer, there is another advantage, says Saga: you won't have to pay any more than the 10% "nabbed by Gordon on your dividend income". Over the years, that break will add up nicely (dividend income to higher-rate taxpayers is taxed at 32.5% outside an Isa). And if you hold bonds in your Isa, you pay no tax on the income at all, says Anna Bowes of independent financial adviser Chase de Vere. Outside your Isa, you'd pay 40%.

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Also bear in mind that the £7,000 equity-and-bond-based maxi-Isa isn't the only option. You can, for example, hold £3,000 in cash in a mini-Isa. No one pays tax on interest paid on cash in an Isa. The savings on offer here are small. If, for example, you go with the best cash Isa currently on offer, you should earn 5%. In an Isa, that means £150 in interest, outside it means £120 for a lower-rate tax payer and £90 for a higher-rate payer. If you are holding cash on account for a long time, it's worth the bother, says Saga. "Free money should always be welcome."