As we approach the new tax year, Howard Goodship, Chartered Financial Planner in Ringwood explains the different types of Independent Savings Accounts (ISA’s) available to you.
What is an Individual Saving Account (ISA)?
An Individual Saving Account (ISA) is a tax efficient wrapper for saving cash or investments. Whilst they have been around for over 20 years (since 1999 when they succeeded PEP’s and TESSA’s), the features and benefits can still be misunderstood.
To simplify matters we have split them into two ( and for this article we will ignore Lifetime ISAs and Junior ISAs):
These act much like a savings account, so capital is not at risk (within protected limits) and interest is earned. However, since the introduction of the Personal Savings Allowance (PSA) the benefits of cash ISAs has somewhat diminished for basic rate taxpayers who can now earn up to £1,000 per annum in interest tax free from their non-ISA accounts (this reduces to £500 for a higher rate taxpayer and is lost for those who pay the additional rate).
In addition, the rates of interest available have been falling for a number of years and in 2021 are now at all-time lows. This low interest rate environment could remain for a number of years as shown by the average rates available for longer term fixed rate accounts (1% for 2 years, 1.1% for 3 years and 1.4% for 5 years-source Money Saving Expert).
What alternatives are available for clients who need an income from their savings or who are aiming for capital growth to meet or beat inflation?
The capital value can fluctuate but the degree of fluctuation can be controlled by the level of risk selected at outset. Assuming a medium level of risk, the assets would typically be split 50% into equities (medium to high risk) and 50% into bonds, gilts and cash (lower risk). Currently the yield earned through dividends and interest could average around 2.5% (Source: L&G Multi-Index 5 Fund 1.8% and LGT Vestra Strategic Income portfolio 3.3%) which can be reinvested for growth or taken as income. The capital value of the investments will fluctuate depending on investment market returns but if invested for over 5 years we would expect the capital value to be maintained and ideally grow to keep pace with inflation. If the yield is re-invested, then we would expect the capital growth to exceed inflation. However, investment returns are not guaranteed, and it is important to understand that the risk of capital loss is why there is the opportunity to earn a higher return than cash.
‘The investment choice in Investment ISAs is wide. Some funds focus on delivering a higher level of income and others offer little income but focus on capital growth. Risks will vary significantly, and this is where professional advice can be invaluable. If you are unhappy with your current ISA, it is possible to transfer from one provider to another (both cash and investments) and maintain the beneficial tax status. One final note, since 2015 ISAs can be passed onto a spouse or civil partner. This was an excellent development, and the surviving partner is eligible for an Additional Permitted Subscription (APS) and can then continue to benefit from the tax-free status of the deceased’s ISA holdings. For more information, please contact the Ringwood office on 01425 208490, or contact a local Lonsdale Wealth Management financial adviser near you.’
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.
Howard Goodship has written several articles for his Understanding Investments series. Read more below.