NICER ISAS

Tax free income and gains are just a click away




TAX-FREE INCOME AND GAINS ARE JUST A CLICK AWAY. THE MOST FLEXIBLE TAX SHELTER JUST BECAME EVEN NICER BUT ANNUAL ALLOWANCES MEAN WHAT THEY SAY: USE THEM OR LOSE THEM.  WORDS BY IAN COWIE.

You don’t need to go offshore to place your savings and investments beyond the grasp of the taxman.

Yes, you may have guessed, I am talking about the individual savings account or ISA: a simple and convenient wrapper that can be used to shelter a wide range of assets from the beady eyes of HM Revenue & Customs.  The ISA annual allowance – or the maximum every adult can save or invest each year in this tax haven – jumped by nearly a third to £20,000 on April 6, 2017 and has been frozen at this level.

So it makes sense to find out more about the new, nicer ISA. Because every adult has their own annual ISA allowance, a married couple or any other pair of people aged 18 or more may shelter £40,000 here this year – or a total of £200,000 over the next five years, assuming the rules remain as they are.  Currently any income or capital gains you receive from an ISA will be free of any further liability to income tax or capital gains tax, whatever your individual circumstances.

ISAs are more flexible than, say, pensions where withdrawals cannot usually be made before the saver reaches 55 years of age. In many ways, ISAs and pensions are mirror images of each other, with tax relief on the latter being received on the way in – when contributions are made – and tax relief on the former being received on the way out, when money is withdrawn.

Cash deposits can be regarded as risk-free in the short term because banks and building societies guarantee to return your original capital; the Financial Services Compensation Scheme can pay depositors 100% of losses up to £85,000 per person.

However, while interest rates remain at or near all-time-lows, many deposit accounts fail to pay sufficient returns to match the rate at which inflation is eroding the real value or purchasing power of money. This means that while you can be confident of getting back £1,000 for every £1,000 deposited, its real value may shrink over the medium to long term because of the insidious effect of inflation.

So it may be worth considering accepting some higher degree of risk in order to seek higher returns to preserve or increase the real value of your savings and investments.

It is very important to remember that share prices can fall without warning and you may get back less than you invest in the stock market. While the past is not necessarily a guide to the future, history does provide food for thought for people who can afford to accept some degree of risk in pursuit of real returns.

Comprehensive analysis of investment performance over the last century or more shows that shares reflecting the broad composition of the London Stock Exchange tended to deliver higher returns than deposits over the medium to long term.

Specifically, shares beat deposits in three-quarters of all the periods of five consecutive years since 1899. The probability of shares delivering higher returns than deposits increased over longer periods of time so that, for example, over any period of 10 years shares did best more than 90% of the time.

Volatility – or the tendency for share prices to fall without warning – remains a worry. So, to avoid the risk that you may be forced to sell during a temporary downturn, you should only invest money in a stock market ISA that you can afford to keep invested for five years or more.

"THE MORE TIME YOU GIVE YOUR ISA TO GROW, THE MORE SATISFYING THE RESULTS ARE LIKELY TO BE."

The sooner you consider getting started, saving and investing in an ISA, the sooner you can start to benefit from this tax shelter. Even making your ISA investment near the start of the tax year – which begins on April 6 – rather than waiting until the following spring can have a surprisingly beneficial effect.

John Butters, Chief Investment Officer at Weatherbys Private Bank, calculates that if a standard 4% per annum investment return is achieved, investing your ISA allowance at the start of each tax year over a decade will produce a fund worth nearly £10,000 more than if the same sums are invested with the same returns at the end of each tax year. Over 20 years, the difference would be £24,000.

That’s a bigger reward for ‘early bird’ ISA investors than you might expect and demonstrates the value of considering action without unnecessary delay. To return to where we began and the importance of taking a ‘timely and methodical approach’ to the new nicer ISA, it’s worth emphasising that the allowance is annual and expires each year at midnight on April 5.

You cannot go back to make use of earlier years’ unused ISA allowances.   So, when it comes to making the most of this flexible tax shelter, it really is a case of use it or lose it.

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