Over the past few weeks there have been dire warnings that the Isa transfer system could descend into chaos.
The argument is that the freedoms given with the advent of the new £15,000 super Isa will lead to a large number of transfers that will swamp providers. But should most savers and investors be getting caught in the cumbersome transfer system at all?
Investors have been trapped into a mindset with Isas. One of these is that the only sensible way to move money is by transferring so that tax benefits are preserved. For many, however, it may be better to cash in an existing Isa and open a new one.
This is particularly the case with cash Isas, but there may also be benefits to adopting this approach with stocks and shares Isas to avoid in specie transfer fees.
We have all heard of the millionaire Isa investors. Perhaps you have some as clients; you may be one yourself. But they are far from typical.
HMRC statistics paint a clear picture of how Isas are used. The average amount subscribed to Isas in the 2012/13 tax year was £3,927. The number for cash Isas was £3,501 and for stocks and shares £5,629. In all an impressive 16.6m Isas were subscribed to.
The average amount held in cash Isas overall at that time was £7,620 per person, while for stocks and shares it was £29,250.
I want to throw just one more HM Revenue and Customs statistic into this mix: in 2011/12 almost 10m of the 23.2m Isas received no further subscription. Some may have been as a result of people investing elsewhere, but some will also have been people reaching the limit of what they had available to invest.
Now, weigh against these facts the new super Isa investment limit of £15,000 per person per year. That is £30,000 for a couple to invest before April 5 – and another £30,000 after then. This is a massive amount for most couples to invest in one year.
What are the advantages of cashing in rather than transferring? For starters, all the top cash Isas refuse to allow transfers in. These include Coventry’s Branch Instant, paying 2 per cent, Nationwide’s Flexclusive, paying 1.75 per cent, and Derbyshire’s and Cheshire’s at 1.6 per cent. The best five-year fixed-rate cash Isa – Skipton at 2.85 per cent – and the top four-year – Coventry at 2.75 per cent – also will not accept transfers.
Then there is the fact that a cash Isa could continue earning interest at the old rate for up to three weeks (15 working days) after the transfer request. And the worst Isa pay just 0.1 per cent.
Also, there is no reason why those who are holding cash in a stocks and shares Isa should not move it to a bank or building society to earn interest on it. The money can always be reinvested later.
So long as the Isa limit is at £15,000 investors have far more freedom. It is time we encouraged them to use it.
So long as the Isa limit is at £15,000 investors have far more freedom___________________________________________
HMRC’s house is well out of order
Just how badly run is HM Revenue and Customs? We have now been told by the Public Accounts Committee that HMRC is owed more than £15bn in tax credit and fines. This is the same HMRC that looks set to be given powers to dip into bank accounts.
Many taxpayers would not object to those who have the means to pay and refuse to do so having their accounts raided.
But the fact is that HMRC makes mistakes again and again. A recurring theme in my post bag is couples who have been completely open with HMRC, yet have been overpaid tax credits and are suddenly expected to come up with repayments running into thousands of pounds.
Another is pensioners who face indecipherable demands because they have two or three sources of income – and those demands are often wrong.
These latest figures confirm what I have long thought – before raiding bank accounts HMRC desperately needs to put its own house in order.
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Post-Budget rush for advice
I was interested to see Skandia’s survey showing that almost two-thirds of advisers had seen an increase in business inquiries since the Budget pension changes were announced.
The survey suggests investors are likely to take a sensible approach to their new found freedom and seek advice on how to generate and maintain an income.
To me it also suggests investors were not the only ones suffering from the restrictive annuitisation approach to retirement. Financial advisers may gain in the long term from this new thirst for advice.
Tony Hazell writes for the Daily Mail’s Money Mail section.
He can be contacted at t.hazell@gmail.com
