With the halfway point in the tax year upon us, why not take this opportunity to review your ISA planning whilst you still have plenty of time to do so. We can all be guilty of leaving things to the last minute and since the changes to the ISA rules give us all a significantly increased allowance, this really should be a top priority for all savers and investors to carefully review any existing ISAs as well as the range of options open to them. To help you act and act fast, our head of savings and investments, Oliver Roylance-Smith, has put together his Top 10 ISA tips, so there can be no excuse for missing out on valuable tax-efficient returns well before the end of the tax year…
Tip 1 – Maximise your ISA allowance
Recent changes to the ISA rules which took effect on 1st July mean that your ISA allowance for 2014/15 tax year is now £15,000, making this latest increase to the ISA allowance the largest since ISAs were introduced in 1999. Remember that this allowance is per person, so a couple can invest up to £30,000 in total this tax year. We will have to wait until the Autumn Statement to find out if the ISA allowance will increase for the next tax year but on the assumption that it at least stays the same, that’s a total of £60,000 between a couple that could be invested in ISAs in a little over six months.
Since the changes to the ISA rules took effect, we have seen many new and existing customers putting the maximum £15,000 allowance into their ISA, clearly seeing the importance of keeping any income and growth from the tax man/ keen to make the most of this valuable tax break. Remember though that this latest increase to the allowance includes any ISA contributions between 6th April 2014 and 30th June 2014.
Tip 2 – Think about the impact of current ISA savings rates
However, despite this generous increase to the overall ISA allowance, it is not all good news, especially for cash savers. This is because the increase has coincided with some of the lowest interest rates available. In fact, the average Cash ISA rate has fallen to the lowest level since the tax-free accounts were introduced 15 years ago with the typical rate on an easy access ISA hitting 1.17% after falling for the last five months in a row*.
So although the increase in the ISA allowance was intended to give us all more incentive to save, the reality is many Cash ISA savers are facing these low returns as banks have actually reduced their rates for fears of attracting too much money. And since longer term fixed rates are offering even worse value for money, many are deciding to retain more than ever before on instant access, which is often losing them money in real terms despite the low inflation environment and the tax free interest paid from the Cash ISA.
Tip 3 – Consider your options carefully and don’t ignore difficult decisions
As savers start to realise that even if the Bank of England base rate does start to increase, the likelihood of this being passed on to savings rates is minimal, many are also beginning to face the reality of either losing money in real terms, or take on more risk. This has created a trend of more and more ISA savers looking towards the Stocks & Shares ISA which has seen record subscription numbers and the average amount invested has never been higher.
Tip 4 – Use your Cash ISA and Stocks & Shares ISA wisely
The increase to the ISA allowance for savers is though significant as the limit has increased over two and a half times from £5,940 to £15,000 – this is because you are now able to put all of your allowance into a Cash ISA, whereas previously this was limited to half of the full ISA allowance.
As before, you are still able to put up to the full amount in a Stocks & Shares ISA, and regardless of how much you put into one type, you can put any balance into the other, subject to the overall £15,000 allowance. This allows ISA savers to give careful consideration to balancing the risk versus reward of their ISA portfolio, whilst remaining safe in the knowledge that the benefits of not paying any tax increases over time so the more you can put away each year, the more you are likely to benefit.
Tip 5 – Get ahead of the game
Despite it being only half way thought the tax year, you should always have half an eye on the end of tax year deadline of 5th April. We can all be guilty of putting off until tomorrow those things which should be done today and we all know how quickly time can fly. There would be nothing worse than being in a position to put money away but simply forgetting to get round to it since once the deadline has passed, you cannot backdate your allowance so it will be lost forever – remember, if you don’t use it, you lose it.
Making sure you act now and put as much away as you can into the current tax year should be a top priority… and here’s why. Let’s say you invest £15,000 in an investment paying 5% income which would normally be subject to income tax. If you only invest right at the end of the tax year, the effect of the beneficial tax treatment is minimal. However, if you invest half way through the tax year, the removal of the 20% tax on your income would have added another £75 – for doing nothing other than being well organised.
Tip 6 – Understand what using your ISA can achieve year on year
Needless to say that in the current financial climate ever penny counts – so why pay tax on money that you can protect from the tax man? If you had invested the maximum into a Cash ISA since they were first introduced and you had received 5% per year, at the end of this tax year you would have a pot of just over £100,000 whilst putting the maximum into an Investment ISA that had grown at 7% each year would see a lump sum of over £225,000. These are sizeable amounts, none of which would be subject to income tax or capital gains tax. Please note that the tax efficiency of ISAs is based on current tax law which is subject to change in the future.
Tip 7 – Check your current interest rate
It’s not in your ISA provider’s best interests to offer you the best deal year after year as this is not where they make their money, and don’t rely on them making sure you are aware that your rate has gone down, an introductory rate has come to an end or that a better rate is available because it won’t happen, even if it is available from the same provider. Banks don’t want your money at the moment and interest rates have been in steady decline, especially for existing ISA customers.
Always check the rate that you get on your current ISA which should be detailed on each statement they send you. Rates change frequently and once you’ve deposited your hard earned cash, your ISA provider knows from experience that you’re unlikely to get round to switching providers even if your rate ceases to be competitive. Don’t be that person! Always check the rate you’re currently receiving and compare it with a wide range of other options on offer. However good your ISA deal seems at the outset, it’s likely that you’ll need to transfer your ISA fairly frequently in order for it to remain competitive.
Tip 8 – Think carefully about timescales
Historically, fixed-rate Cash ISAs tended to offer higher interest rates than instant access Cash ISAs. However, the current low interest rate environment means that the uplift available in return for locking up your cash is barely worth your while. This means that those with fixed rates or introductory rates coming to an end are likely to be facing a significant drop in the level of interest they receive, even for those who do not require immediate access to their capital.
If you are able to tie up your Cash ISA savings but can’t find a competitive fixed-rate deal, you may want to consider the range of structured deposits available. These plans combine capital protection with the potential for higher returns than are generally available from instant access or fixed-rate Cash ISAs. Investment ISAs should generally be considered as a longer term option, with most requiring a minimum commitment of five years in order to offer competitive returns. In addition to funds, there is a wide variety of both growth and income investment plans, all of which offer a defined return for a defined level of risk.
Tip 9 – Don’t forget the transfer option
You can transfer all previous ISA holdings, whether they are in a Cash ISA or an Investment ISA. This means that you can keep all of your ISA savings and/or your investments in one place. With such low interest rates, many are considering transferring Cash ISAs into Investment ISAs as they face the impact of low savings rates. The upside here is the potential for higher returns while the downside is that such returns are not guaranteed and your capital is put at risk. The New ISA rules now mean that you transfer from an Investment ISA to a Cash ISA as well as vice versa, thereby offering greatly flexibility and choice. Always remember to check first if any charges apply on transfer.
Tip 10 – Maintain your ISA at all costs
Whilst your savings and investments remain in their tax-efficient ISA ‘wrapper’, the benefits become more and more valuable over time as the compound effect of not paying tax each year builds and builds. This is why not only should you try and maximise your ISA allowance each year, but you should also aim to make sure your ISA is the last money you dip into since as soon as you take money out of your ISA it loses these benefits and starts to become subject to tax.
Finally, start as you mean to go on…
Since the increase in the ISA allowance to £15,000 there is no excuse for making sure you make the most of this valuable tax break. So start as you mean to go on, review your options carefully and make sure you benefit from up to a half a year of extra tax-efficient returns by taking action now – this also means one less thing to worry about until 6th April next year…
Compare our Top 10 NISA investment plans »
* source, Moneyfacts
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment depends on your individual circumstances and may change and may be subject to change in the future.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.
Structured deposit plans are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of it shares is not a guide to its future performance.
The investments referred to in this articles are structured investment plans are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index or any shares listed within the Index is not a guide to their future performance.
