Plant the money tree in springtime

Some patches of land for growing money trees are cheaper than others, or put in different terms, some investment vehicles are not taxed whereas others are.

Isas, which have enjoyed massive growth in recent years, are among the most popular and accessible means of tax-efficient saving, their growth in popularity possibly due to there being no restrictions on when they can be used. Unlike pensions which only become available for use at the age of 55 – rising to 57 from 2028 – Isas can be dipped into at any time.

They currently come in two sizes, either cash Isas in which you pay no tax on your interest; and stocks and shares Isas, in which no capital gains tax is paid, nor any further tax on any income.

Danny Cox, head of financial planning at Hargreaves Lansdown, points out that in many cases, it costs no more to hold cash and investments inside an Isa than to hold them outside so investors can receive these tax benefits for free.

All change

In the Budget earlier this month, the chancellor made some unexpected changes to Isas that will take place from July 1.

At the moment there is a limit on the amount which can be sheltered in Isas, which between April 6 until July 1 is a limit of £11,880 of which £5,940 can be in a cash Isa.

From July 1, however, the government is merging the two types of vehicle into the New Isa (Nisa) allowing transfers between the two types. It is also raising the annual limit on investments into Nisas to £15,000. This can be solely in a cash Nisa, a stocks and share Nisa, or a combination of the two.

In his Budget statement George Osborne stated: “Twenty-four million people in this country have an Isa. And yet millions of them would like to save more than the annual limits...Three-quarters of those who hit the cash Isa limit are basic rate taxpayers.

“So we will make Isas simpler by merging the cash and stocks Isas to create a single New Isa. We will make them more flexible by allowing savers to transfer all of the Isas they already have from stocks and shares into cash, or the other way around.”

Short-term solution

Mr Cox says under the current regime: “Cash Isas work very well for short-term savings of less than five years or as an emergency fund; the interest is tax-free and savers should shop around to ensure they receive a good interest rate.” However he cautions that over the long term cash Isa returns are unlikely to beat the rate of inflation, the rate at which prices rise.

Stocks and shares Isas, meanwhile, have the capacity to provide significantly higher returns for investors who are prepared to waive the capital security of cash.

Interest on cash in a cash Isa is paid gross, whereas within a stocks and shares Isa the income is only paid gross on corporate and government bonds, on everything else, including cash, the income is paid net of basic rate tax but doesn’t incur higher tax rates.

Tom Stevenson, investment director at Fidelity Worldwide Investment, notes: “We would urge savers to make the most of this flexibility and consider if their savings are working hard enough to meet their goals. Those stuck in low-paying cash Isas should consider that equities could provide much greater potential for long-term growth and income.

“Savers have for too long been the losers from the low interest rate environment.

“It’s likely we will now see a proliferation of temporary bonus rates and would urge savers to look through these and consider how they can best achieve their long-term goals.”

There is a limit to the amount of money that can be parked in Isas, but these investment vehicles have their flexible aspects, for instance, an Isa can be transferred from one provider to another with all tax benefits retained.

Catherine Lafferty is a freelance journalist

The rise of the Nisa

The government announced iin the Budget 2014 that, from July 1 2014, Isas will be reformed into a new simpler product, the ‘New Isa’ (Nisa) with equal limits for cash, and stocks and shares. The Nisa will have the option to save the whole allowance of £15,000 in cash, stocks and shares, or any combination of the two.

Example options for investors:

• £15,000 to a cash Nisa and nothing to a stocks and shares Nisa

• £15,000 to a stocks and shares Nisa and nothing to a cash Nisa

• £5,000 to a cash Nisa and £10,000 to a stocks and shares Nisa

• £10,000 to a cash Nisa and £5,000 to a stocks and shares Nisa

• A combination of amounts between a cash and stocks and shares Nisa, up to the overall annual limit of £15,000

Key points

• The overall Nisa limit for 2014-15 will be £15,000, an increase of £3,480 from the 2013-14 limit.

• Investors are able to open one cash Nisa and one stocks and shares Nisa each tax-year. Once open, you can transfer your cash or stocks and shares Nisa between providers as often as you wish.

• From July 1 2014, existing Isas will automatically become a Nisa, with a higher limit and more flexibility.

• Investors are able to hold cash tax-free within a stocks and shares Nisa if the provider allows this.

• The list of qualifying investments for Nisas will be extended to include peer-to-peer loans. The government “will continue to explore further extending the list to include debt securities offered via crowdfunding platforms”.

Source: HM Treasury