Happy Birthday ISA!
Individual Savings Accounts (ISAs) celebrate their 30th Birthday in the tax year 2017-18 with a major increase in the allowance to £20,000 per annum.
Believe it or not, ISAs and their predecessors Personal Equity Plans (PEPs) celebrated their thirtieth birthday in March having been announced by Nigel Lawson in the Budget of 1986 and introduced in 1987. Although there have been various changes to rules and names in the interim, the basic structure remains in place. They are tax advantaged savings products which, by definition, belong to an individual. Contributions into ISAs (up to a maximum annual contribution of £20,000 per individual adult in 2017/8 tax year up from £15,240 in 2016/7) are in effect made from taxed assets but, once in the ISA “wrapper”, income generated by cash, bonds, shares and some other instruments is tax free. Capital gains are not subject to tax but, by the same token, any capital losses cannot be used to offset gains made outside the ISA.
For many years now ISAs appear to have been regarded as the savings vehicle of choice by successive governments as a result of their relative simplicity and transparency and the idea has even been postulated that personal pensions, which can be fiendishly complicated, should in some way be amalgamated with ISAs in order to make them simpler. The “lifetime ISA” or “LISA” announced last year, which includes a contribution from the Government for eligible investors, might be seen as the beginning of this process. It is certainly interesting that successive governments have continued to increase the annual ISA allowance, while many other allowances and contributions have remained static, or been reduced in the general scramble to increase tax revenue.
For many years now ISAs appear to have been regarded as the savings vehicle of choice by successive governments as a result of their relative simplicity and transparency...
In this context it makes sense to make use of those tax advantaged products that remain - especially those that the Government seems keen to promote. People often question the merit of investing what seem relatively small sums annually in such products but it is a truism that if you start early and invest over a long period the advantages can be substantial particularly if dividend income is reinvested. We calculate that a husband and wife investing the full PEP and then ISA allowances in the UK Equity market (FT All Share Index) and reinvesting dividends since these wrappers were launched would, between them, now have approaching £1.5m in their ISAs. This can easily sustain a tax free income of £50,000 per annum while not compromising the real capital value of the investments over the medium to long term. The opportunity to start investing even earlier now exists through the medium of the Junior ISA where the annual limit on contributions stands at £4,128 - but do bear in mind that the funds cannot be accessed until the child is eighteen.
Investment within an ISA encompasses a very wide range of instruments and asset classes ranging from individual company shares listed on both the main and AIM markets, through corporate and government bonds, and collective investments covering global markets.
Investment within an ISA encompasses a very wide range of instruments and asset classes ranging from individual company shares listed on both the main and AIM markets, through corporate and government bonds, and collective investments covering global markets. They can be accessed in a variety of ways from low cost brokers and investment platforms to diversified portfolios managed on a discretionary basis. The breadth of asset classes and instruments means ISAs can be structured to suit a broad range of investment requirements in terms of risk, income generation and growth potential. In short, if you have the wherewithal, make sure you use your ISA allowance every year.
In short, if you have the wherewithal, make sure you use your ISA allowance every year.