The Isa has formed the cornerstone of the nation’s savings for the past 20 years
Diligent savers have less than six weeks to take advantage of this year’s £20,000 allowance for saving money tax-free into an individual savings account.
The Isa has formed the cornerstone of the nation’s savings for the past 20 years since it was introduced by Chancellor Gordon Brown in April 1999.
At the time the annual allowance for saving into a cash Isa was £3,000. But generous increases since then mean anyone who saved the maximum cash sum would have a £141,520 pot plus interest.
Until 2014, the annual allowance for saving into a stocks and shares Isa was more generous than for cash savers. Over the same 20-year period, our investor could have put a total of £206,500 into the stock market tax free. If this investment attracted an annual return of 5 per cent, their savings would have turned into £320,000 according to investment platform Interactive Investor.
Today’s six-week warning gives individuals time to swot up on the market, boost old accounts and lay the ground for a better performing nest egg. But head scratching may be required. There are now half a dozen types of Isa available, hundreds of accounts to choose from, a vast gulf between the best and worst rates, and enough rules to satisfy the strictest of teachers.
‘It’s easy to be paralysed into indecision, but you don’t have to pick the perfect option from the outset,’ says Sarah Coles, personal finance analyst at investment company Hargreaves Lansdown.
‘You can put cash into a stocks and shares Isa to secure your allowance and then take your time to drip feed it into investments. Alternatively, use a cash Isa and transfer later if you wish.’
GIVE OLD SAVINGS POTS A NEW LEASE OF LIFE
Money stagnating in old cash Isa accounts which pay a pittance in interest should be tackled first. Though you can only pay new money into one cash Isa account each year, you are free to transfer money already held in cash Isas between accounts as much as you like. So move money that is held in accounts that no longer offer a competitive rate. Use websites such as SavingsChampion and Moneyfacts to seek out better rates.
Those holding an investment Isa should not be staring out of the window while cash savers do their homework – charges and fund performance should also be up for review. Expensive or poorly performing accounts can be transferred to a cheaper platform or different funds. To compare platform charges visit the website boringmoney.co.uk.
The individual savings account was introduced 20 years ago this April by then Labour Chancellor of the Exchequer Gordon Brown
LOOK BEYOND YOUR HIGH STREET FOR PROVIDERS
Two fifths of cash Isas are kept with the provider that savers use for their current account. This is often a costly mistake. For example, someone receiving 0.35 per cent interest from a Lloyds Bank Cash Isa Saver sacrifices 1.1 per cent of interest by not switching to a top paying alternative such as Virgin Money’s Double Take E-Isa, which pays 1.45 per cent. This interest is the equivalent of missing out on £220 a year on a £20,000 Isa balance.
Building societies often pay better rates on cash Isas. Those appearing in our Best Buy tables on page 103 include Coventry, Faminly and Darlington. Challenger banks that do business by phone, internet or post rather than via branches also offer good rates. Consider Shawbrook Bank, Aldermore, OakNorth, Charter Savings Bank and Kent Reliance. For investment Isas look beyond traditional City firms to low-cost online platforms such as Nutmeg, Wealthify and Moneyfarm.
DODGE PENALTIES TO PROTECT YOUR PROFIT
When moving money from one Isa to another it is vital to stick to the rules. For example, switching before an account’s maturity date can trigger a penalty amounting to a whole year’s interest.
Hands up if you can remember Tessa!
The individual savings account was introduced 20 years ago this April by then Labour Chancellor of the Exchequer Gordon Brown.
It was an overhaul that replaced personal equity plans (PEPs) and tax-exempt special savings accounts (Tessas), with stocks and shares Isas and cash Isas.
Someone who maximised their stocks and shares Isa allowance every year over the past two decades could have a pot worth £320,000 today, according to research by investment platform Interactive Investor.
This could generate an income of close to £15,000 a year based on the current Footsie yield of 4.58 per cent.
Long-term savers may also remember maxi and mini Isas, a distinction abolished in 2008. One provider looked after a maxi Isa, with a mandatory investment element.
Up to three providers could look after one mini Isa, covering cash, stocks and shares, and the less popular life insurance Isa.
In 1999, annual allowances were £7,000 for a stocks and shares Isa and £3,000 for a cash Isa. These limits stayed at those levels until 2008, when they were nudged a tad higher.
Significant leaps came in 2009 for the over-50s, and for everyone else in 2010, 2014 and finally 2017 – when the £20,000 allowance was introduced.
The Junior Isa joined the family in 2011, replacing child trust funds, followed by the launch of the innovative finance Isa in 2016 and the Lifetime Isa in 2017.
Neither should anyone close an Isa and withdraw the money so that they can deposit it into a new one. This takes money out of its tax-free environment, so that when you invest it again it counts towards your £20,000 annual allowance.
Instead, providers should do all the leg work of Isa transfers for you. Simply ask the new provider for an Isa transfer form to sign. In many cases if you apply for an Isa online you will be asked if you wish to transfer an existing Isa and the form will be sent automatically.
EMBRACE THE NEW ISA FREEDOMS
ISA rules have been relaxed in recent years. Lisa Ashford, of provider Ethex, says: ‘Savers can spread money between cash, stocks and shares and peer-to-peer loans.’
You can only actively contribute to one of each type of Isa every year. There are four main options – cash, stocks and shares, innovative finance and lifetime Isas. Only £4,000 a year can go into the latter. Since 2014 it has been possible to move savings from a stocks and shares Isa to a cash Isa. Previously only the reverse was possible.
Anyone who thinks they will need short-term access to money should seek the ‘flexible Isa’ label. This lets customers take money out and replace it later, without affecting their annual allowance as long as it is done in the same financial year. Bereaved spouses can also now inherit an additional Isa allowance. When a husband or wife dies leaving money in an Isa, their spouse is credited with a one-off additional annual allowance equivalent to the sum held in the account.
TAKE MORE RISKS… BUT DON’T GO TOO FAR
Experts agree that savers often play it too safe. Sarah Coles says people think of risk in ‘skewed terms’ focusing on losing value in stocks and shares Isas over the short term, while not considering the risk of inflation eating into their wealth long term. She adds: ‘Ride out short-term volatility to take advantage of long-term growth.’
Sam Handfield-Jones, of Octopus Choice, which offers innovative finance Isas, says: ‘You are currently guaranteed to lose money in real terms in a cash Isa as inflation is higher than most interest rates.’
But money should not be invested entirely in risky products either. He says: ‘It doesn’t have to be all or nothing. People increasingly look for a diversified portfolio of Isas.’
Innovative finance Isas are appealing as the investments are easy to understand (loans to people and businesses) as is the risk (borrowers defaulting on their loans). But independent financial advice is recommended for investments. Find an adviser via the website unbiased.co.uk or the Personal Finance Society at thepfs.org/yourmoney.
CHECK IF YOU’RE ELIGIBLE FOR STATE TOP-UPS
A bonus worth 25 per cent is paid on lifetime and Help to Buy Isas for those looking to buy property. On lifetime deals the top-up is limited to £1,000 a year until age 50 or whenever the money is used to purchase property. It can be held in cash or stocks and shares, and alongside other Isas, but counts towards your annual savings limit.
A Help to Buy Isa cannot be opened in the same tax year as a cash Isa but can sit alongside an investment one. An initial deposit of up to £1,200 is allowed, followed by sums of up to £200 a month. The maximum bonus available when you come to buy is £3,000. If you wish to take out a Help to Buy Isa you must do so by November 30 this year. You can continue to contribute to it until 2029.
AND FINALLY… IT’S TIME FOR ‘BED AND ISA’
Once your Isa portfolio is in shape it may be time to ‘bed and Isa’. This is a process of selling tax-liable investments, then buying them back within the Isa wrapper, to safeguard future profit from tax.
Coles says: ‘Ideally you will make gains just below the annual capital gains tax allowance of £11,700, then reinvest in the same stocks within an Isa. But you need to allow time for sale and repurchase before the end of the tax year.’