The latest incarnation of the Isa has arrived, and it will affect not only the investment advice you give your clients but possibly your retirement planning advice too.
The New Isa came into being on 1 July, and offers potentially the biggest round of changes to the Isa rules since they were introduced in 1999. Not only has the amount you can invest in a Nisa risen to £15,000, there is now no limitation on how that amount is split between cash and investments – it is down to the individual to decide what works best for them.
Not surprisingly, there has been a rush of companies looking to increase the appeal of their Nisa products yet, according to a recent study, around 32m Britons are oblivious to the existence of Nisa.
Kevin Mountford, head of banking for Moneysupermarket.com, said: “I am surprised so many people are unaware of the introduction of Nisas. Similarly, there is a clear lack of understanding among many as to the rules and benefits of saving into one.
“The launch of Nisas is brilliant news for savers: not only will they be able to switch stocks and shares into cash – a move that was not possible before 1 July – but the annual limit will rise to £15,000. This is almost three times the previous cash Isa limit and almost a third more than the stocks and shares limit. However, with so many people unaware of these rules, more needs to be done to ensure people will reap the rewards.”
Of course, this is where advisers come into their own, and ensuring their clients know exactly what they can do within the Nisa rules will be key to not only giving the best advice, but also offering clients the best opportunities for their investment growth.
Discount broker Willis Owen estimates the launch of Nisas could lead to an additional £4bn in Isa investments in this financial year alone. Its research has found two-thirds of its customers plan to invest an additional £2000 in their Isas. By extrapolating that figure across the 2.9m stocks and shares Isas in existence, according to figures from HMRC, it equates to a £3.9bn boost. This is clearly a market advisers would ignore at their peril.
Jason Chapman, managing director of Willis Owen, said: “It looks like we are facing a bumper summer for Isa investments, thanks to the new ‘nicer Isa’. Isas are one of the few remaining tax breaks available to everyone, and while the pensions industry faces a time of uncertain change, the New Isa is already emerging as a credible and flexible way to save for retirement. In a recent poll of our customers, nearly six in 10 (58.5 per cent) said the primary reason they invested in an Isa was for retirement.
“This predicted increase in Isa investments may well be a result of people transferring funds from other savings in an attempt to make the most of the tax-free wrapper. But as Isa investments increase, so the need for a long-term view becomes all the more important. It is also critical that these extra investments contribute to a diversified portfolio that minimises exposure to risk.”
The credibility of Isas as a retirement planning tool has grown with the recent reduction in the amounts that can be invested in a pension each year – now down to £40,000 – which has been somewhat offset by the rise in the Nisa allowance. But with Isas offering additional flexibility for pension savers, including ongoing accessibility and tax relief on the income rather than the contributions, they have become more popular as a means of saving for retirement.
An additional benefit is that if you save money in an Isa as a 20 per cent taxpayer, then reach a point where you are a 40 per cent taxpayer, you can move the Isa money into a pension and recoup the higher rate of tax relief.
Despite these clear benefits, there are other key reasons for using a Nisa for pension saving over and above a traditional pension that are hard to ignore. For example, Tom McPhail, head of pensions research at Hargreaves Lansdown, highlighted that while the Nisa is virtually tax-free, offers growth without capital gains tax and no income tax on interest or further tax on dividends, it can also help protect your age-related allowance.
Mr McPhail said: “In the case of investors born before 6 April 1948 with an income of £27,000 or more, for every £2 of taxable income above this level, they lose £1 of age-related allowance.
“Nisa income is not only free from further income tax but does not count towards the age-related allowance ‘means’ test. For those born between 6 April 1938 and 5 April 1948, the personal allowance increases from £10,000 to £10,500 (£10,660 for those born before 6 April 1938).
“However, for every £2 of taxable income over £27,000, the additional age-related allowance reduces by £1. This creates an effective tax rate of 30 per cent and, for those with a pension income of £27,000 and interest income of £1000, it will cost an additional £100 plus the standard £200 in income tax. But, shelter this interest income in Nisa and it does not count towards this age allowance test saving – in this example, a total of £300 income tax.”
Mr McPhail added that the same applied for those who have a taxable income of more than £100,000. They can save as much as £4000 on the loss of their personal allowance, which is eroded by £1 for every £2 they earn above £100,000, meaning the personal allowance is “completely extinguished by the time that income reaches £120,000”.
While the marketing machines of the big banks, building societies and investment houses are obviously geared up to encourage investment into Nisas, there is good reason to sound a note of caution. With the top-rate instant-access cash Isa paying just 1.5 per cent a year, according to Which?, it might be worth considering an alternative investment for clients.
Stuart Law, chief executive of property investment specialist Assetz Capital, commented: “Although it is not yet possible to include peer-to-peer investments in an Isa wrapper, loans currently listed through us pay returns of between 8.75 and 13.5 per cent a year gross. Even after tax at the highest UK rate, this would lead to returns of between 4.8 and 7.4 per cent a year before any defaults and losses. To date, we have not experienced any losses, but the expected loss rate is 0.5 per cent.
“It is great news that people can now get more tax relief on their investments, but in a market where even the top instant-access Nisas struggle to match inflation, investors need to look elsewhere if they are to make their money work for them.”
There is considerable excitement about the new rules for the Nisa product, and real reasons for clients to make the most of the additional investment opportunities it presents this year, especially now that they can move their stocks and shares Isa money to a cash Isa from any year if they want to reduce exposure to risk.
However, it will be down to advisers to guide these people towards the best choices. The more options client have, the tougher it will be for them to do the right thing for their financial future.
Alison Steed is a freelance journalist
