ISA’s are a popular means of investment, especially for those whose main priorities when investing is flexibility and being tax efficient, of which an ISA caters for both. The allowances on ISA investment is becoming increasingly generous and maximising these allowances each year can make part of a solid retirement plan.
The nicer (NISA) way of investing
The ISA structure changed in July 2014, introducing the N(ew) ISA with more flexibility and an increased annual tax free allowance. All these changes are incentives by the government to encourage investment into savings and to get the UK public thinking about putting away money for their retirement.
Retirement planning is becoming more and more essential, with the average life expectancy increasing and state benefits becoming less attractive – anything that can be done in advance to plan ahead is of high value to a better quality of retirement.
Using your ISA allowances
Despite the situation that the UK economy is still recovering, making use of the ISA allowance each year is a good, tax efficient way to save excess income.
It’s important to note that if you don’t use it, you lose it! Allowances are not rolled forward if they are not used.
The allowances for every individual over 18 is £15,240 in the 2015/2016 tax year. This is an increase from £15,000 last year.
This means that you can save £15,240 this year and pay no tax on the interest earned.
As an example, if you invested £15,000 with a 3 percent interest rate in a regular savings account, as a basic rate tax payer you would earn £450 interest but only get to keep £360. As a higher rate tax payer you would keep just £270. With an ISA you keep the full £450, as no interest is applied.
The more you invest towards the maximum of £15,240 limit, the greater the saving and the greater the pot at the end of the day – if you don’t withdraw it.
Flexible investments
Before the NISA, there were restrictions on whether your investment was held in a Cash ISA or a Stocks and Shares ISA (also known as Equity ISA’s).
The NISA though allows 100 percent of investments to be held within a Cash ISA – great for those savers who want to have easy access to their money should they need it. Alternatively, the funds (and risk) can be split between a Cash ISA and a Stocks and Shares ISA and they can run concurrently together, as long as jointly their value doesn’t exceed the allowance limit.
Stocks and Shares ISA’s are generally used to boost retirement savings and to supplement income such as pension income in retirement.
The main restriction is that each individual saver can only open one Cash ISA each year. However, in the long term there are no limit to the number of Cash ISA’s you can hold.
Junior ISA’s
Junior ISA’s (JISAs) are also available for children under 16 with the maximum annual investment limit of £4,080 (15/16). This is an increase from last tax year of £4,000.
Have you thought about using a JISA as a tax efficient way to save for your child’s future?
Other key points about an ISA
- ISA’s are individual – you can’t have them in joint names. However, from April 2015, spouses and civil partners can now inherit their partners ISA allowance upon death.
- Transfers can be made between Cash ISA’s and Stocks and Shares ISA’s. From the Autumn 2015, as announced in the 2015 Budget, it will be possible to transfer Cash funds in and out of an ISA and for this to not count towards the annual subscription limit – as long as it is within the same tax year.
- An amalgamation of various Cash ISA accounts is allowable, but must be arranged properly
- Similarly, amalgamating Stocks and Shares ISA’s is an option by using what is known as a “wrapper”. This reduces paperwork and enhances manageability, although essentially the ISA investments remain separate.
- The ISA allowance is likely to continue increasing, however the decision is down to the Chancellor and is usually announced in the Autumn Statement of Annual Budget.