The changes to the ISA regulations announced at the latest Budget were a big boost to regular savers and investors with the government setting out a clear strategy of encouraging both activities through tax incentives. So what’s new and why is the new ISA which is introduced from July 1st better?
The headline change in the new ISA is that the annual allowance has been increased significantly and you will now be able to take advantage of tax free investment or saving to the tune of £15 000, up from the previous £11 800 cap. According to private client investment group Best Invest this equates to a potential £50 000 tax free gain over 12 years when compared to the current allowance. The company’s figures are based on an example investment return of 5% per annum after fees, compounded annually.
The new ISA rules also allow for greater flexibility and have broken down the distinction between cash ISAs and Stocks and Shares ISAs, which were until now distinct wrappers. Now investors have one wrapper that they can invest stocks and shares, cash or a hybrid of the two into, reducing admin fees and benefitting the general ease of managing savings and investments.
Cash is paid a rate of interest on which varies depending on the ISA provider and is usually tied to the ‘lock-in’ period which you must commit to or face early withdrawal penalties. Stocks and shares earn from dividend payments if applicable, not all companies pay dividends to shareholders and when they are paid they vary from year to year depending on the performance of the company, as well as any gains in the value of stocks and shares. Of course when investing in stocks and shares there is a risk that their value may also fall from that which you originally bought them at.
**I already have an ISA, can I still invest £15 000 into it this tax year or do I need a new one?**
If you have already taken out and started to pay into an ISA from the beginning of the new tax year, don’t worry, you don’t have to take out a new one. Although the new allowance quotas do not come into force until July 1 that simply means that before then you can only invest up to £11 800 until then but from July 1 on until the end of the tax year you can then top it up to the full £15 000 allowance.
The new rules also make bringing older ISAs from previous years together in one place for easier management more flexible. It is worth noting that there can however be fairly strict penalties if you are still within a fixed interest period on a cash ISA. When that period has expired you will usually just have to pay a relatively modest transfer fee. Don’t withdraw, transfer, or you will lose the tax free status of the cash. Also, many providers, especially those offering attractive interest rates, will limit or not allow you to transfer old ISAs into a new one to take advantage of that high rate. With stocks and shares ISAs in most cases it will just be a case of paying the admin fee to transfer it. You should make your own judgement call on if you feel that that is worth paying transfer fees (it’s usually in the region of £25) for the ease of management of having everything in one place if you have different ISAs from different years with different providers.
**One-off investment or regular drip-feeding?**
In the case of an investment ISA whether it is better to make a one off investment or drip-feed into the ISA throughout the year is really a case of personal choice and your experience in buying stocks and shares. If you are confident enough to make your ISA stock picks once a year and find that more convenient, then that’s the way for you. However, Bestinvest suggest the following strengths of the drip-feeding approach:
• Boost your investment returns over the long term through the power of compounding
• Reduce the effects of short-term volatility and smooth the market’s highs and lows
• Mitigate knee-jerk reactions and poor market timing
• Your money grow tax-free for longer vs last-minute ISA investing
• Build a stronger saving practice
**Are Junior ISAs changing too?**
Bestinvest also explain the changes to Junior ISAs:
“Like full ISAs, on 1 July Junior ISAs are enjoying an increase in their total yearly allowance and you can invest in stocks and shares, cash, or any combination of the two on behalf of a child.
Although it is a more modest boost, from £3,840 to £4,000, the fact that anybody can contribute into a Junior ISA account on behalf of a child makes it possible to collectively build up a significant sum for their future. You can’t withdraw money from a Junior ISA untill a child turns 18, but investing £4,000 into one year after year would result in a portfolio valued at more than £100,000 on their 18th birthday, assuming an annual growth rate of 5%, although this does not take into account capital losses. When considering education and property costs, Junior ISAs should be seen as a powerful savings tool for somebody’s future”.
The new ISA rules are designed to encourage investment and saving so are basically significantly more attractive than the old ones. The allowance has been raised and they have been made more flexible is the bottom line.