The new Isa (Nisa) is a day old and, despite speculation that a rush of investor funds could wobble providers’ systems, savers shouldn’t be deterred from making the most of the enhanced benefits of the liberalised tax wrapper.
What has changed? Among several new rules, the amount of money an individual can shield within the wrapper each year has risen from £11,880 (for a stocks and shares Isa) to £15,000. The full annual allowance can also, for the first time, be placed in a cash Nisa. Further, investors can now freely transfer funds between previous years’ stocks and shares and cash Isas if they wish. But how should the Nisa be approached?
Fears that a flood of investors, using new freedoms to shift money out of stocks into cash, will cause chaos at providers are overstated, says Jason Hollands of Bestinvest. Hargreaves Lansdown research found the Nisa will not affect investors’ allocation to stocks and cash significantly. And Rebecca O’Keeffe of Interactive Investor says that, although worries about a stock market correction might make cash look more attractive, “we’re not expecting to see a significant number of people transfer into a cash Isa yet.” In fact, she says, since investors are now able to purchase “cash funds, short-dated gilts and bonds” in a stocks and shares Nisa, this opens up “a range of very low risk investments which may well be attractive for savers who are being penalised by their banks.” A shift into cash may not be necessary.
Instead, for cash Isas, Hollands thinks the “main area of activity will be among savers reorganising their balances with their existing banks, moving from taxable savings accounts into enlarged cash Isas.” The tax benefits are impressive. Nisas are virtually tax-free, with no capital gains tax, no income tax on interest, or further tax on dividends.
Even with cash rates so low (Comparethemarket’s best buy instant access cash Isa, from Harpenden Building Society, pays 2.25 per cent a year), tax savings can make a difference. According to Savings Champion, if you had put the maximum possible each year into the cash Isa (and its precursor the Tessa) from 1991, a basic rate taxpayer would receive an extra £500 a year in tax free interest compared to a taxable account. For a higher rate taxpayer, it would be even more.
If you’ve waited until now to open a cash Nisa this tax year (or if you’ve opened a variable rate Isa since April), filling it with the full £15,000 allowance should be simple. It may be more difficult if you’ve opened a fixed rate Isa. As Savings Champion notes, “fixed rates offer a fixed interest rate from the outset for the term of the account. To lock into these rates, you generally sacrifice access to your money throughout the term and few accounts will allow additional deposits.” But many providers are offering a window – some until the end of July, others until the end of the tax year – allowing you to top up a fixed rate Isa. It’s worth checking their details.