Introducing ISAs

Individual Savings Accounts – ISAs – allow UK taxpayers to save or invest up to £20,000 (tax year 2017-8) without paying tax on any interest they receive.

The products described herein are typically managed by the product provider whereas much of the content in the ISA section will focus on the Self Select ISA which is a tax-wrapped account that allows the DIY investor to make their own investment decisions.

‘by fully subscribing each year and achieving an investment return of 7% p.a. after fees, it is possible to build up a £1 million ISA pot within 22 years’

ISAs have been around for nineteen years now and with increasing allowances it has been estimated that by fully subscribing each year and achieving an investment return of 7% p.a. after fees, it is possible to build up a £1 million ISA pot within 22 years.

As the title implies, ISA allowances are individual so it is possible for a tax-paying couple to shelter up to £40,000 each year.

There are two key variants of the managed product:

• Cash ISA – a savings account into which you deposit cash
• Stocks and Shares ISA – a tax free wrapper that manages your investments

On 6th April 2016 there was a new addition to the family:

• The Innovative Finance ISA – allows peer-to-peer loans to be sheltered from tax.

You can pay into one account of each type in any tax year in any combination of cash and stocks and shares up to the annual subscription limit; New ISA (NISA) rules allow unhindered transfers to be made between cash and stocks and shares products subject to the terms of the provider.

There is no limit to the number of different ISA products you can subscribe to over time.

Although interest rates are currently relatively low, Cash ISAs may be suitable for short-term savings as they offer easy access to your money (potentially with a penalty on fixed term products), while a Stocks and Shares ISA may be preferable if you can afford to leave your money untouched for longer periods – perhaps 5 – 10 years – albeit that your investment may go down in value during that period and there is no guarantee that you’ll make a profit.

Stocks and Shares ISAs come with a range of options – for DIY investors comfortable with making individual investment decisions, most execution only brokers will offer an ISA wrapper which is effectively a tax efficient basket into which the investor can assemble their chosen portfolio of permitted investments – shares, bonds, funds etc.

Those that would prefer to be a little less hands on in terms of their investments can choose from a wide range of ready-made ISAs from banks, building societies, investment managers or other institutions; online technology and the FCA’s commitment to ensuring that financial institutions deliver transparency and good value for money, means that it is relatively simple for a would be investor to compare the various options that exist – accepting that the small print will contain the requisite caveats about past performance.

For those that would rather hand over responsibility to an adviser – fleshy or otherwise – a wide range of options exist; whether accessed directly online, or dispensed by one of the new breed of financial advisers, digital investment managers – robo advisors – can deliver and manage a personalised and risk adjusted portfolio of investments, within a tax efficient ISA account.

Whichever option you choose, the ISA allowance for any given year expires at midnight on the 5th April, so it really is a case of use it or lose it, and even if you are light years away from subscribing to the max, whatever you are able to commit will benefit from time in the market and the miracle of compound interest; Do it Yourself, Do it With me, Do it For me – just don’t do nothing!

ISAs at a Glance

• Those aged sixteen or over can open a Cash ISA
• Those aged eighteen or over can open a Stocks and Shares ISA
• There is a Junior ISA (JISA) for those saving for children under the age of 16
• You can open one Cash ISA and one Stocks and Shares ISA each tax year
• You can withdraw money as with any other saving account
• If switching providers funds should be transferred rather than withdrawn in order to preserve its tax free status.

The Help to Buy ISA, launched on 1st December 2015 to help first time buyers on to the property ladder is a type of Cash ISA meaning that if you pay into one you can’t also pay into another Cash ISA in that tax year.

Previously, if you withdrew money from an ISA it didn’t cost you the tax-free interest you’d already accumulated but you lost that element of your lifetime tax-free entitlement; if you then put money back in, it counted against your annual subscription limit in the year that you re-invested it.

‘it is possible for a tax-paying couple to shelter up to £40,000 each year.’

However, in the 2015 Budget it was announced that there would be changes to this system with the introduction of ‘radically flexible ISAs’ from 6th April 2016 that allowed savers to withdraw and replace money from their Cash ISA without it counting towards their annual subscription limit as long as the repayment was made in the same tax year as the withdrawal.

ISA Transfers

It is possible to change ISA provider without losing your tax-free allowance but this must be conducted as a transfer rather than a withdrawal and a reinvestment.

New rules allow you to switch from a Stocks and Shares ISA to a Cash ISA and vice versa, and also between the same types of products.

The Financial Conduct Authority (FCA) requires guaranteed seven-day transfers between Cash ISAs for all but the smallest providers.

Within a tax year you’re only able to transfer the whole of your annual ISA to a new provider, whereas amounts from previous years may be transferred as a whole or in parts if the provider allows partial transfers.