By: Tim Bennett
28.02.2019
28.02.2019
ISAs are an investing no-brainer for many people. Tim Bennett looks at why before highlighting an important drawback.
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Three ways ISAs help equity investors (and one way they don’t)
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Three ways ISAs help equity investors (and one way they don’t)
The Individual Savings Account is designed to help investors accumulate money tax-free. This week I recap the key benefits before pointing out one pitfall for older investors.
Background
The current tax year for individuals ends on 5th April. The reason this is so important for ISA investors is that, unlike pensions, the allowance cannot be carried forward if it remains unused at that date. So, anyone wanting to use this year’s needs to get a wiggle on.
Nuts and bolts
Thanks to a decision to introduce several different types of ISA, the government has not made things easy for investors trying to understand what is on offer. That’s why I am going to focus on the basic adult ISA here and not get side-tracked by the various other alternatives (which include, Lifetime ISAs, Innovative Finance ISAs, Help-to-Buy ISAs and Junior ISAs). There is a danger otherwise of missing the wood for the trees! Here is a summary of the basic deal;
There are a number of advantages to using the ISA allowance as an investor, but I will focus on three here. Bear in mind that the argument for an ISA is much somewhat stronger when it comes to stocks and shares than it is for cash, with interest rates low and a savings allowance of £1,000 available to all basic rate taxpayers.
1. Investing flexibility
ISAs are getting better and better, in terms of how you can use them, as this slide summarises;
It is worth bearing in mind that you can start by wrapping cash inside an ISA these days and then simply move it out into stocks and shares at a later date – there is no longer a distinction between the old “cash” ISA and the “stocks and shares” ISA. This will suit anyone who wants to use the tax shelter on offer without necessarily committing all their funds at once.
2. Tax-free growth
Critics of stocks and shares ISAs may point to the tax-free dividend allowance of £2,000 available outside an ISA in 2018/19. However, bear in mind that this has already been reduced from £5,000 and was a relatively new idea when it was first introduced. It also does nothing to provide protection from capital gains that fall over the annual tax-free threshold. The power of tax-free, rather than taxed, growth is shown here;
3. No lock-in
Unlike pensions, ISAs offer complete flexibility around withdrawals. However, be careful if you do take money out and don’t replace it within the same tax year – the future tax benefits are then lost.
One drawback for older savers
Although ISAs have many upsides, there is one less useful point to bear in mind – unlike pensions, ISAs do form part of a death estate for inheritance tax purposes. This will be a consideration for older savers and anyone looking at which assets they run down first in retirement. For spouses, there is a piece of good news in that the Additional Permitted Subscription allows one spouse’s ISAs to, in effect, be transferred to another on death. The mechanism is that the surviving spouse applies for an additional ISA subscription equivalent to the value of any accrued ISA assets held in the name of the deceased spouse. This offers a way to preserve the tax benefits. An Investment Manager or Wealth Planner can offer further help in terms of the exact process and any other planning considerations relating to ISAs more generally.
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