There was good news for savers in July as the new ISA account - the NISA - came into existence. The new rules mean you can save more and be more flexible with your tax-free investments. This short Q&A offers Barchester clients a simple guide to the new system.
What is a NISA and how much can I save tax-free now?
The annual ISA allowance along with pension scheme tax relief is one of the most useful and valuable tax allowances available to individual UK residents.
The NISA means you can now save up to up to £15,000 a year tax free, an increase of almost £3,500 from the old limit – meaning a married couple can save up to £30,000 tax free.
By helping people open an ISA with an appropriate provider, Barchester gives you access to hundreds of investment options and, if you require, our advisers can suggest several ways that your extra pot of tax-free savings can be invested to align with your personal ethical and environmental values.
What is simpler about it?
As most Barchester clients will know, you can choose to save either in cash (i.e. like having a tax-free savings account), or in ‘stocks & shares’ (i.e. by investing in companies). Under the old rules there used to be a set limit to how much you could invest in each category – but now you can choose to put it all in cash, or all in stocks & shares, or split the 15k anyway you like between the two. So it’s more much more flexible.
Investments made within a NISA also don’t need to be declared on your tax return making them simple to administer.
Are there other taxes to consider?
Assets held within a NISA are exempt from personal income tax and all capital gains are tax-free. If you are concerned about inter-generational planning however, then it’s worth noting that ISA savings are potentially still subject to Inheritance Tax.
So what is the difference between a cash or stocks & shares NISA?
It’s not that one is better than the other – it depends on your requirements, timeframe and your attitude to risk.
For short terms funds, where access is required within a 3-5 year period, cash is a good option because you have relative certainty that the value of the money will not fluctuate overtime.
Stocks & shares are subject to much more investment risk and volatility but returns can also be greater, especially over the longer term. Looking at data from Financial Express FE over the long-term (August 1999 to the present day) the FTSE All Share has returned 102.83% compared with a return on cash (Moneyfacts 90 day notice account) of 42.90%. Over the same period the impact of inflation (Retail Prices Index) would have been to reduce the purchasing power of capital by 55.24%.
Either way the useful tax benefits of a NISA make the process of ‘compounded’ growth all the more effective over time
What is ‘compounded’ growth?
The magic of ‘compounded’ growth means that your savings have a bigger and bigger impact over time, and is a factor that is unfortunately quite often ignored by individuals looking to save into the ISA savings wrapper. Take the two examples of Joe and Sandra:
- Joe invests £500/month in the more secure cash ISA, with an annual effective rate of 2.5% per annum. Over 26 years this would give a final balance of £219,419. If we adjust this for inflation at the current rate of 1.9% the value of this account in today’s terms would be £133,937.
- Sandra is prepared to take a little more investment risk and invests £500/month in a stocks & shares backed ISA investment fund, and as a result her annual return over the long-term is 5.5%. On this basis the eventual value of the fund would be £345,280, which adjusted for inflation at 1.9% would give a final value in today’s terms of £210,765.
As always, please remember that past performance is not a guide to future returns.
For more information on NISAs or any aspect of our work please see our
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