Isa's

By Julie Hutchison, Personal Finance Expert, Standard Life

I can’t make promises, of course.  But it’s not an impossible dream for some people.

Investing for the long term

Think of the time frame here – if you start using an ISA when you’re in your 20s, and invest the maximum amount every year for several decades, you could be in a great position to build a truly valuable nest egg.

A quick browse online and you’ll read about existing ISA millionaires. You’ll also see predictions about how long it’s likely to take an ISA investor to reach millionaire status these days. Recent changes to ISAs mean people could become millionaires even faster than before – in 27 years some claim – as the amount you can invest each year has increased.

Whatever your target might be, are you up-to-date on the new ISA (NISA) rules and what they mean for you and your nest egg?




The new ISA – what’s changed?

As of 1 July 2014, the ISA got a serious makeover.  It’s now much simpler.  Here’s what’s changed:

Old rules : 6th April 2014 – 30th June 2014 New rules : 1st July – 5th April 2015

 

Total Annual allowance £11,880 £15,000

 

Maximum permitted for stocks and shares £11,880 £15,000
Maximum permitted for cash £5,940 £15,000
ISA transfers from stocks and shares to cash permitted? No Yes
ISA transfers from cash to stocks and shares permitted? Yes Yes

 

As you can see, the annual limit is now much more generous and there are no restrictions on the proportion you can save in cash, or invest in stocks and shares.  And there’s new flexibility to move from stocks and shares into cash.  This is good news as it could encourage more people to try investing, with the knowledge that they can get out of the stock market and into cash when they want to – but keep their money inside the ISA.

Why ISAs make good sense

An ISA can help your money to grow more effectively because of the tax advantages.  You don’t pay income tax on dividend income or bank interest.  And if you’re reinvesting that income by rolling it up inside your ISA, you get the benefits of compounding – future ‘growth on growth’.

If you’re investing in an ISA, the second tax advantage is there’s no capital gains tax to pay.  This means you can change the funds or shares you hold without worrying if they’re standing at a gain.

And finally, when you take money out of your ISA, there’s no income tax to pay on that withdrawal.

Tidying up your ISAs

If you are setting a goal of any sort, even to become an ISA millionaire, are you keeping track of your progress?  You may already have several ISAs and if that’s the case, do they need a bit of a tidy-up?

It’s worth remembering that you can transfer a Cash or Stocks and Shares ISA from previous tax years into your new ISA, and it doesn’t use up any of your current tax year’s allowance.  That could prove useful, if you’ve reached the point where you feel you have enough cash saved and you’re ready to move into investing.  As ever with investing, you need to be ready for the ups and downs of the stock market, but over the long term, investments usually offer better potential for growth than cash.




Family finances

If you’ve already used your full ISA allowance for this year, then bear in mind you could boost your family finances by funding the ISAs of your loved ones.

A helpful detail to keep in mind for inheritance tax is that anything you gift to your spouse or civil partner is usually exempt from this tax.

But if you’re gifting money to your children or grandchildren for them to use in their ISA, that cash gift is likely to have a 7 year clock on it.  This means if you live for 7 years after making the gift, it falls out of your estate for inheritance tax purposes.  There is a small annual exemption of £3,000, which doesn’t help much.  The exemption for regular gifts from surplus income is however worth exploring.  If you are considering gifting from income, I’d recommend you take independent legal advice to stay on track with this more complex tax exemption.

Your early retirement plan

An ISA can also be a key part of any early retirement plans you have.  Generally, you can’t take money out of your private pension until age 55 – and it’s increasing to age 57 in 2028.

If you want to move to part-time working, go travelling or pursue other opportunities in your early 50s, your ISA nest egg could help to fund that lifestyle change, in the years before you can take money out of your pension.

A nicer ISA

Sitting alongside your ISA, your pension savings are also a core part of your nest egg.  But assuming you’re already making the most of saving into your pension, your new ISA gives you more simple and flexible options when it comes to how you build your nest egg and use it.

 

Julie HutchisonJulie Hutchison is a regular blogger at Moneyplus.This article is not financial advice.  An ISA which holds stocks and shares is an investment.  Its value can go up or down and it may be worth less than you paid in. Tax and legislation can change in the future. 

 

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