Despite dwindling interest rates, with the right approach, even sticking to cash can mean you are quids in
Announced in the Budget, the new, enhanced and simplified Isa arrives tomorrow. Allowing investors to shield up to £15,000 a year away from the taxman – up from the current £11,880 limit for stocks and shares Isas – the New Isa (Nisa) also represents a liberalisation of the rules governing the popular tax wrapper.
While you can only subscribe to one cash Nisa and one stocks and shares Nisa each tax year, from tomorrow, there will be no limits as to how much of the total annual allowance can be placed in each (you could previously only put up to £5,940 into cash each tax year). Cash can now also be held tax-free within a stocks and shares Nisa, and previous years’ Isa funds can be transferred freely between cash and stocks and shares. And if you’ve already opened a cash Isa this year, provider permitting, you should be able to make additional payments to top-up to the full £15,000 annual limit. But what will the Nisa do for cash returns? And what new options does it present savers with?
THE CASH DEALS
With a rush of funds expected, it’s perhaps unsurprising that cash Isa rates have fallen on average recently. Comparethemarket’s head of money Rob Saunders has called the Nisa a “false dawn”, noting that the average rate of annual interest on a three-year fixed rate cash Isa had fallen from 2.04 per cent in March 2014 to 1.93 per cent in mid June.
But some are bucking the trend. Aldermore Bank has increased rates on its one, two, and three-year fixed rate cash Isas. Virgin Money has also increased pay-outs, with its one-year fixed rate Isa paying 1.76 per cent. If you’re willing to be locked in for longer, Leeds Building Society’s five-year cash Isa pays 2.85 per cent.
With inflation at 1.5 per cent on the consumer price index, even these relatively low returns won’t lose you money in real terms. And recent research by Hargreaves Lansdown suggests that new Isa freedoms are unlikely to see any great shift either from cash to stocks and shares, or the other way round. As Rebecca O’Keeffe of Interactive Investor says, “many savers will undoubtedly be reluctant to increase their risk levels that much.”
But it’s the tax benefits that could really count. Nisas are virtually tax-free, with no capital gains tax, no income tax on interest, and no further tax on dividends. Hargreaves Lansdown has pointed out some other potential benefits.
Nisa income doesn’t count towards the income tax personal allowance means-test (where the allowance falls by £1 for every £2 you earn over £100,000). If you earn £100,000 and have £20,000 of fixed interest income, outside the Nisa you’d pay £8,000 in income tax payments on the investment and a further £4,000 due to the lost personal allowance. Inside the Nisa, that £12,000 would be yours. A similar principle may apply to those faced by the High Income Child Benefit Tax Charge, which penalises families where one earner is paid more than £50,000 a year.
BEST OF BOTH WORLDS
And even if these new freedoms won’t incentivise you to move further up the risk curve, the removal of tax from cash held in a stocks and shares Nisa does mean that the cash park facility – where you can hold cash uninvested – becomes more attractive. Further, O’Keeffe notes, in a stocks and shares Nisa, “investors will be able to purchase cash funds, short-dated gilts and bonds under the new Isa rules, which open up a range of very low risk investments which may well be attractive for savers who are being penalised by their banks.”