‘Lines are blurred’ between new Isas

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Tax-efficient investing – March 2016

‘Lines are blurred’ between new Isas

Cash Isas and stocks and shares Isas are two of the most recognisable and accessible tax-efficient vehicles for investors. They are suitable for those who have anywhere from a few thousand pounds to set aside, to those who are able to utilise the current maximum £15,240 allowance.

Part of the appeal of these types of products is their flexibility and ease of use, with investors able to access the money in their Isa should they need to.

Adrian Lowcock, head of investing at Axa Wealth, says they are a useful “starting place” for those saving for the first time.

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He explains: “This accessibility is useful when you are just beginning to save and invest, as it takes a while to adjust to how much you can afford to save and unforeseen costs can put demands on an individual’s cashflow. The usefulness of an Isa shouldn’t be ignored later on. The income produced is currently free of tax, which is attractive compared with a pension.

“In addition, lifetime allowances on pensions mean that Isas are also attractive to those who have used most of their pension allowance up or could easily breach their allowance in 10 or 20 years’ time.”

However, the Isa market has had a shake-up recently with the introduction of the Help to Buy Isa, launched by the government last December in a bid to give first-time buyers a leg-up on to the property ladder.

The chancellor George Osborne unveiled the Lifetime Isa in his Budget on March 16, also aimed at those saving for their first home, but perceived by many to be the precursor to a Pension Isa.

From April 6 this year investors will also be able to open an Innovative Finance Isa, under which interest and gains from peer-to-peer (P2P) loans will be eligible for the tax advantages.

Ian Peacock, head of UK and Ireland at IG Group, notes: “I can only see Isas growing in popularity due to the flexibility they offer and the support the government is giving them.

“The fact that the government is allowing P2P loans to be held in the Innovative Finance Isa can only be a positive for individual savers, as they now have access to a new type of investment within a tax wrapper that offers solid returns.”

LIFETIME ISA: At a glance

What we know so far about the new Lifetime Isa, which will be available from April 2017:

• A Lifetime Isa can be opened by those aged between 18 and 40.

• An individual can save up to £4,000 a year into an account, with no minimum monthly contribution.

• Savers into a Lifetime Isa will receive a bonus of 25 per cent from the government, so up to £1,000 a year.

• The savings in this Isa can be used towards buying a first home worth up to £450,000.

• Those with a Help to Buy Isa can transfer their savings into the Lifetime Isa from 2017, or continue saving into both.

• After turning 60, savings in this type of Isa can be withdrawn tax-free.

• Savers can withdraw money from a Lifetime Isa at any time before the age of 60, but will lose the government bonus and be subject to a 5 per cent charge.

• The total amount that can be saved into all Isas will rise to £20,000 from April 2017.

Source: HM Treasury