ISAs – Tax breaks for all generations
Like the Personal Equity Plans (PEPs) and Tax exempt Special Savings Accounts (TESSAs) that preceded them, Individual Savings Accounts (ISAs) have proved immensely popular with savers and investors – from those with a few hundred pounds saved to the fortunate investors that now have £1m-plus portfolios after contributing the maximum since PEPs started.
“The funds accumulated in their JISA can help a young adult with university or housing costs when really needed.”
The introduction of Junior ISAs two years ago opened up the concept to younger generations as a tax-sheltered home for their capital, including gifts from family and friends. Whilst saving income tax on interest earned through a Cash ISA can help the compounding effect over the years, sums invested can have their value eroded by inflation. In happier economic times, interest earned on a Cash ISA could easily outstrip inflation. Today’s low interest rate climate, plus persistent above target inflation, has made it harder to counteract inflation, even in a tax-free Cash ISA.
The unfavourable interest versus inflation setting has led more people to consider the Stocks & Shares ISA (which also escapes Capital Gains Tax). This option does not guarantee the return of amounts invested, although stock market performance over the past two or three years has been positive, when measured by the FTSE 100 and similar indices that value a basket of shares. This growth trend may or may not continue.
Many analysts believe that one reason for advances in share prices has been the switch in the relationship between interest available on deposits, including Cash ISAs, and the dividends on equities. Historically, interest on deposits often exceeded the yield on UK shares; for now at least, the boot is on the other foot, as some equities provide attractive levels of income – with the 10% deducted from dividends being the only tax payable if held through an ISA. Note that even major companies can cancel or reduce their dividends.
When considering ISA investment, it is important to decide whether a Cash ISA, a Stocks & Shares ISA or a combination would suit your needs and objectives, in terms of access to your money if needed and your preparedness to accept risk to capital and income. In any event, only up to half of the annual ISA allowance may be held in cash, whilst up to the full allowance (£11,520 for 2013-14) may be put, in one go or perhaps monthly, into stocks & shares – optionally through a collective investment scheme that can spread risk across many different companies’ shares, in the UK or globally.
The annual allowance for Junior ISAs for 2013-14 is £3,720. Within this, a qualifying minor may have a mix of cash and shares, but their money cannot normally be touched before they reach 18. Anyone can pay in, but an adult ‘registered contact’ is usually responsible for overseeing the account. The funds accumulated in their JISA can help a young adult with university or housing costs when really needed.
Source: Sterling North Simply Money; Winter Newsletter 2014.
