The new ISA
It’s the biggest change to savings in a decade and a half. But the New Individual Savings Account – the NISA or nicer Isa – arrived with a whimper, rather than a bang, despite even better tax and investment freedoms.
The big increase in how much you can put away each year – plus an unprecedented shredding of restrictions – in the spring budget caught banks, investment companies and financial advisers unawares. They had just three months to prepare for NISA - not long enough for many.
NISA, like ISA is free of income tax on bank interest and stock and share dividends and free of capital gains tax if you make a profit when you sell. You don’t declare it on annual tax returns. But the benefits stop when you die – your family will have a possible inheritance tax bill.
Despite the lack of publicity, the NISA is up and running – so you can make the best of it, putting more away lots more each year – nearly three times as much if cash is your thing.
The NISA replaces the old ISA, which in turn – for those interested in history – superseded the Personal Equity Plan. It has two headline pluses over the previous ISA. Everyone over 18 can invest up to £15,000 a year – that’s £30,000 for a couple – more than 25 per cent higher than last year’s limit. Those aged 16 and 17 also have this allowance but there are some strings.
Many won’t want or be able to save £15,000 and you can, in theory, start with just £1 (lots of financial firms have higher starting levels, however). And you don’t have to have the cash in one go – most NISA plans let you save monthly.
But more importantly, NISA tears up rules on what you can save in bank or building society accounts and how much you can invest in stocks and shares. The old rules were so difficult to follow that finance firms and the media resorted to flow-charts and spreadsheets to explain what you could – and could not – do. Many got it wrong, leading to warning letters from the taxman, and sometimes demands for additional tax payments.
Now the only figure that matters is £15,000. You can still have two accounts each tax year – one for cash deposits and a second for stocks and shares. But you no longer have to worry about what goes into each provided the total does not top £15,000. It could be divided equally or all in one or the other or some other combination.
And also out of the window go all those rules about switching previous years’ ISAs between stock market investments and cash. It’s no longer one way – cash to stocks and shares but not back again. With NISA you can switch between these two whenever and how often you wish.
The new freedoms make NISA a rival to pension plans for long term retirement savings. Pension contributions attract tax relief, and grow tax free. But you cannot get at the money until you are 55 (with a few exceptions such as a terminal illness diagnosis) and, after taking 25 per cent of your pension pot tax free, everything after that is taxed.
NISA has no tax relief on the way in. But it grows tax free, you can take the money out whenever you want, and when you withdraw funds, you pay no tax at all. NISA can give you a permanent flow of tax free income.
Which is better? It all depends on your needs, employer pension provision, your tax position now and into the future, and whether you feel you can trust yourself to leave your NISA to grow until you retire without spending it. But whatever answer you come up with, it’s going to worthwhile to do the equations.
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