The 6th October marked one of the most significant changes to Individual Savings Accounts (ISAs) since their introduction ten years ago. The annual ISA allowance for anyone aged 50 and over by 5th April 2010 increased to £10,200. Even those under 50 years of age can still invest £7,200, and whatever your age we believe you should consider opening your ISA now.
The ISA allowance may have changed, but all the benefits remain. With ISAs you pay no capital gains tax and no further tax on the income. You can invest for income or growth and withdraw your tax-free savings whenever you need. The new rules simply mean that you can now shelter more of your assets from tax than ever before.
Why invest in an ISA now?
First, in our view the poor state of the public finances means tax rises are inevitable, initially for the very wealthy but then for almost everyone else. ISAs shelter your capital from tax.
Second, it seems unlikely that the Bank of England will want to risk stalling any economic recovery by raising interest rates in the near future. Investors currently holding cash face a double whammy - higher taxes and negligible returns - but there is an alternative.
We believe, if you're comfortable with the risks, stock markets are looking attractive. Over the last six months share prices have staged a marked recovery. However, we maintain this has been a 'miserable rally' because many people kept cash on the sidelines and missed out. It is the sheer weight of uninvested cash earning so little on deposit which makes us think this rally has further to go. Many of the investors we talk to say they will use any setback as a buying opportunity, so when the market does fall back they invest, driving prices back up again.
Of course, there are no guarantees. Trying to forecast short term market movements is extremely difficult. However, we do think we are currently in a short term sweet spot so if you have deposits earmarked for investment we believe you should consider investing in an ISA now.
How much can you invest in your ISA?
Each tax year you have an ISA allowance (a tax year runs from 6 April one year to 5 April the next). By making full use of your ISA allowance every year you can build a substantial portfolio of tax efficient investments, but if you do not use it by 5 April the opportunity is lost forever.
The amount you can invest depends on your age. If you will be aged 50 or over by 5 April 2010 then you can now invest up to £10,200 each tax year. This can all be invested in a Stocks and Shares ISA; or up to £5,100 in a Cash ISA with the balance (within the overall £10,200 limit) in a Stocks & Shares ISA.
Everyone else can save up to £7,200 this tax year. Up to £3,600 can be invested in a Cash ISA, with the balance (within the overall limit) in a Stocks & Shares ISA.
If you wish to make an appointment to discuss the increase in ISA allowance please contact us on; 01244 347583.