ISASÖNISAs ñ Whatís the big deal?
Since their introduction in 1999, ISAs have provided UK savers with a tax free haven on investment returns saving investors bundles of cash. From July 1st, new legislation comes into action, entailing a number of significant reforms which aim to simplify the current system whilst maximising returns on your investment. Literally dubbed New ISAs (NISAs), this refreshing reform yields many other new freedoms.
Arguably, the most notable amongst these is the increase in the amount you can put into an ISA, which will grow by £3,120 from £11,880 to £15,000. Moreover, although your current maximum deposit in an ISA stands at £11,880, only half of this (£5940) can be cash. However, following the implementation of new regulations, you will be able to use the full £15,000 limit for either cash, stocks & shares or both.
Certain rules still apply, as you can only open one cash NISA and one stocks & shares NISA per tax year. However, you can open alternate NISAs and transfer your old ISAS into them. Any ISA opened between 6th April and 30th June will automatically change into a NISA, with all its added benefits included.
Transferring savings between cash & stocks and shares will have a far greater degree of flexibility with all capital gains and the majority of your income kept tax-free. To summarise, if you invest £15,000 every year and your investments grow at 5% annually, you will have £1m to your name in 25 yearsí time.
The consequences of this somewhat radical reform promise to be invaluable to savers of all ages.
Early Birds ñ Short Term goals for the young
Reforms applied to the ISAs centre around the ability for account holders to save more cash. Following July 1st, the full £15, 000 allowance can be used in the manner which is most suitable to the account holder, whether that be cash, shares or other relevant investments.
This is particularly advantageous to those savers of a youthful disposition with pressing short-term goals: such as reliable car or a deposit for a first home. The ability to move investments into cash immediately and vice versa is extremely helpful if a lump sum needs to be expended on a necessity. Though it is true that monetary reserves invested in stocks & shares do yield higher long-term returns than cash, they are subject to turbulent fluctuations which could affect your short term aims.
That being said, it is worth nothing how low cash ISA rates are at the moment and according to recently FCA approved data, seem to be on a downwards trend. However, with the market on the up and the recent remarks of Bank of England governor, Mark Carney, suggesting that interest rates are set to rise earlier than anticipated, increased competition is on the horizon and cash ISAs should prove to be popular with savers.
SOLIDIFYING ñ EARLY FORTIES
Ok, youíve got around twenty years to retirement, youíre hopefully far into your career path and have compiled a portfolio of personal value. The prudent option for many would be to guard their portfolio from the mercurial swings of the market. The way to do this is to split your capital so that you possess a mix of assets ñ bonds, cash and shares.
Under old ISA regulations, you werenít able to move shares into cash form ñ at least not with the simplicity which underscores the NISA system. Interest rates were lower on stocks & shares ISAs than cash ISAs and additionally, any interest was taxed. From 1st July, this constriction will be scrapped; savers will be at liberty to switch between shares, bonds and cash, thus, allowing those who are coming into the latter stage of their working lives to minimise the risk attached to their assets.
This aforementioned switching process must occur in the form of an ISA transfer, however, otherwise investors will be subjected to the annual allowance in place, i.e. £15, 000. Do not sell your shares and re-invest the takings in a cash ISA; this will be seen as a new subscription. For example, if a saver has amassed £400,000 in stocks & shares over the past two decades and he/she decides to move around £80, 000 into cash, this can be smoothly completed using an ISA transfer, however if he/she sold shares and thus, took money out of the IS system, this would be counted as a new subscription and the maximum that could be re-invested in a NISA would be the £15, 000 cap.
SEEKING EARLY RETIREMENT VIA YOUR NISA PROFITS
Living off the income generated by your ISAs can prove a comfortable and gratifying existence in later life, providing you are wise in your investment. Firstly, it is worth mentioning that under new rules, all ISA related income is entirely tax free. That will keep your hair from greying for a while longer!
Next, the money question: how ought you to invest your ISA profits to produce a steady flow of income which is not at risk of suffering due to unpredictable market fluctuations?
Again, our advice would be to vary your portfolio, mixing your assets ñ that includes stocks & shares, cash and property deeds ñ the income of which should aptly satisfy your retirement needs. Property can be handled efficiently by the use of multi-asset funds. The UK is the fastest growing market for multi asset funds, with inflows of £23.5bn in 2012, according to Lipperís global research team.
However, not only is cash an important aspect of broadening your portfolio, but also for a personal reason. If at a time of economic stagnation you need to withdraw a lump sum of money, say for a home improvement or to help a struggling relative, the NISAs show their worth. Under old rulings, you would have to sell some of your investments. In a depressed market, you would need to sell more shares than usual, costing you potential future profit, affecting your long term goals.
With the NISAs, comes the ability to withdraw a lump sum from your cash savings instantaneously, giving the shares time to go up once more.
Last of the Summer Wine ñ Combatting Inheritance Tax
Even under old ISA rulings, many have made a substantial profit over the past decade and longer. With the added degree of flexibility and higher allowances coming in, it will become even easier to generate significant amounts of profit through your tax-free NISA.
When you are around 65 years old and have retired, thus receiving no regular income, capital will be acquired in different ways ñ through a pension, inheriting assets from a relative per se or other investments. You can put £15,000 in a NISA every year.
However, as NISA savings are seen as comprising part of your estate, you- or rather your children or beneficiaries- are liable to inheritance tax at 40% following your death. Moreover, the ëtax wrapperí protecting the contents of your NISA will be removed and your savings will be taxable once more.
Available since 2013, AIM shares can help you elderly folk combat the looming tax dangers ahead, AIM shares are listed on Londonís Alternative Investment Market (AIM). These shares typically comprise smaller, ambitious companies and more pertinently, a lot of these shares qualify for exemption from inheritance tax. Due to new rulings, they can now be bought and kept in an ISA and will thus go some way to relieving your tax burden.
YOUíD BE A FOOL NOT TOO
Tax free, Flexible, Exponential profits ñ these are but a few one liners that can be used to stress the benefits of the NISA scheme, set to be implemented on the 1st July. Any saver worth his/her salt ought to look into opening one which suits their particular individual needs. Remember, thereís profit to be made by those of all ages ñ youíre never too old to make money!
Compare Cash ISAs with MoneyExpert.