Archived News 22/04/2014
Take advantage of higher ISA allowances
Believe it or not ISAs and their predecessors PEPs will be twenty seven years old in March having been announced by Nigel Lawson in the Budget of 1986 and introduced in 1997. 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 (the 2013/2014 allowance is £11,520 per individual adult) are in effect made from taxed assets, but once in the ISA “wrapper” income generated by cash, bonds and some other instruments is tax free and income which has already been subject to withholding tax, notably from dividends, attracts no further tax. 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.
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. It is certainly interesting that 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 raise tax revenue. On the latter point, investors should be under no illusions that the Government remains desperate to increase tax revenue in the face of a fiscal deficit still running at an annualised rate of over 7.5% of GDP and unlikely to be eliminated until 2018 at the earliest.
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. 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 over £1m in their ISAs. The opportunity to start investing even earlier now exists through the medium of the Junior ISA where the annual limit on contributions stands at £3,720 - but do bear in mind that the funds cannot be accessed until the child is eighteen.
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.
Investment within an ISA encompasses a very wide range of instruments and asset classes ranging from individual company shares now 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 have used your ISA allowance in the current tax year and do so again early in the next tax year.