Although some readers of Investors Chronicle may be planning to use the new £15,000 Isa allowance, there is no doubt that the raised limit is a tax break for the very rich. According to research from TD Direct Invest, 30 million adults don’t plan to utilise the extra £3,120 of tax-free saving up to April 2015. Meanwhile, Bestinvest points out that only 43 per cent of those earning more than £150,000 have already been using their full Isa allowances.
Even discount broker Willis Owen, which claims two thirds of existing Isa savers will be increasing their Isa by at least £2,000 this tax year, admits this predicted increase in Isa investments may be a result of people transferring funds from other savings, in an attempt to make the most of the tax-free wrapper.
The most worrying thing about Isas, is that eight out of 10 people using Isas are putting their money into cash Isas, where they are suffering from poor rates and their money will be eroded by inflation. Meanwhile, cash Isa providers are not leaping at the chance to launch new products for the new Isa regime. Rob Saunders, head of Money at comparethemarket.com, says: "It appears that the much anticipated rush of money into Isa accounts has led banks to cut rates, meaning that savers need to think carefully about the best options open to them."
According to comparethemarket.com, in March 2014 the average rate of interest on a three-year fixed-rate cash Isa was 2.04 per cent but has since dropped to 1.93 per cent. Similarly, the one year average rate of interest on cash Isas has fallen from 1.59 per cent to 1.48 per cent. So the introduction of 'Nisas,' which was heralded as a golden dawn for savers, is in fact, something of a false one.
Yes, cash Isas are a good home for emergency cash money (three- to six-months' salary). But many people making additional savings into cash Isas, would be better off paying off their mortgage or considering a stocks and shares Isa as a long term flexible retirement plan (with access to your money in an emergency).
The New Isa: key facts:
Any Isas opened between 6 April and 30 June will automatically become a 'Nisa'. From 1 July, you'll be able to add further money up to the new £15,000 limit for the 2014/15 tax year. However, previous years' Isas can't be topped up to the new limit.
The new Isas will be more flexible so you can not only transfer cash Isas to stocks and shares Isas but vice versa. This is great for investors who want to protect their money from a potential stock market fall as they will be able to receive tax free interest on cash in stocks and shares Isas.
Two tips for the New Isa regime:
If you’re going to top up your Isa this week, make sure that the extra investments contribute to a diversified portfolio. Platforms and stockbrokers are giving out myriads of investment tips for your New Isa money. However, it may be more sensible to top up an existing investment, rather than find something new to invest in. The Investors Chronicle’s portfolio clinic is full of examples of investors who have too many small value holdings in their portfolios.
Junior Isas will have a higher tax-free allowance of £4,000 a year from 1 July, meaning a family of four can stash away as much as £38,000 tax free each year. However, it is best for parents to fully fund your own Isa first - you will have more control over the money and can pass it to your children in the future.