20th March 2014
Chancellor Osborne gave savers an unexpected boost in this week’s budget, with significant changes to the Isa rules. He raised the maximum investment threshold, announced simplifications to the structure and allowed the inclusion of new investment types. Isas have always been popular, but should now be a more potent force in a saver’s arsenal. Cherry Reynard analyses the changes.
It is fifteen years since Isas first launched and there have been tweaks along the way – incremental raising of the investment threshold, allowing Aim shares to be included and the introduction of Junior Isas in place of Child Trust Funds, for example. However, the changes announced in this week’s budget were the most far-reaching to date. They were also a surprise: it had been thought that the Chancellor was inclined to reduce rather than raise the tax benefits associated with Isas.
Initially the Chancellor raised the maximum annual investment from its current level of £11,520 to £15,000 in July. He also raised the annual investment level for the Junior Isa and Child Trust fund from £3,720 to £4,000.
Perhaps more importantly he also announced plans to make the structure of Isas simpler, with the creation of a ‘New Isa’. Jason Hollands, managing director at BestInvest explains: “To date there have been separate allowances for Cash ISAs and Stocks & Shares ISAs with transfers allowed from Cash ISAs into Stocks & Shares ISAs, but not the other way around. Today it was announced these will be merged into a single allowance, massively hiking the amount that more conservative cash-based savers can shelter from the tax man.”
This is important not simply because it allows high amounts to be held in cash – after all, cash rates are still unattractive and likely to remain so until interest rates rise – but because it improves the flexibility for all Isas investors, enabling them to switch to and from cash, shares and bonds. This means that investors can change their asset allocation more easily over time, shifting to higher risk assets when they have a longer time frame, and to lower risk, or income generative assets when they approach retirement. It means that nervous investors could take out a Stocks and Shares ISA and later transfer back to a Cash ISA if better rates become available, or if they believe the stock market is about to weaken.
The greater simplicity in itself was also welcome. Research by F&C Investments suggests six out of ten people are ‘baffled and confused’ by investments, so it believes that any simplification of the rules should help increase understanding of the potential benefits of investing.
Finally, there were also changes to the allowable investments within an Isa. The Chancellor said that peer to peer lending would now be a permissible investment. These are schemes from groups such as Zopa, which match borrowers looking for low rate loans with savers looking for higher interest rates than those available on a bank account. The regulation comes into effect on 1st April and offers another income option for Isa investors.
This change comes on the heels of the change in regulation to allow Aim shares in Isas. Investors now have a broad range of options, including standard open-ended funds and investment trusts, plus ETFs, single shares, Aim stocks and commercial property funds. Investors can now build a highly sophisticated portfolio using Isas.
The move was enthusiastically welcomed by investment experts. Nick Hungerford, chief executive of Nutmeg, called it ‘fantastic news for all UK investors’. He added: “Leveraging the ISA brand is exactly the right thing to do. The public understands it and likes it. In particular, it is supremely more attractive to young savers than pensions. Taking ISAs to a new level of flexibility and expanding the annual allowance to £15,000 from 1st July this year is music to our ears.”
He said he’d like to see the Chancellor go one step further with the launch of a ‘super ISA’ – either of cash or stocks and shares, which is free of inheritance tax and capped at £1m. He wants to see the annual limit for that super ISA set even higher – £50,000 for the under 50s and £25,000 for those over the age of 50. The Chancellor may feel that he has been generous enough for this year – maybe he will reconsider as the election looms in 2015.