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Tax-efficient investing – March 2016‘Lines are blurred’ between new Isas
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.
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.
In the space of a few short years we will have gone from having two simple Isa choices to at least five Isa options Adrian LowcockThe 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 |
But AJ Bell chief executive Andy Bell warns there is a danger of ending up with a “spaghetti soup” of Isa products.
He points out: “Talk pre-budget was about making pensions simpler, what Mr Osborne has done is make Isas more complex.”
Mr Lowcock is concerned the new Isa offerings are complicating what has, up to now, been a successful and simple savings product.
He says: “I think many investors understand the difference between stocks and shares Isas and the new Help to Buy Isa. But the difference between the Innovative Finance Isa and a cash or stocks and shares Isa is less clear. The lines are blurred.”
Mr Lowcock adds: “On the surface, the Lifetime Isa looks to be a good thing as it aims to address the issues that face young savers, who have been put off by the lack of accessibility and complexity of pensions.
“However, in the space of a few short years we will have gone from having two simple Isa choices to at least five Isa options. How these Isas, and the tax allowances associated with them, interact with each other is already becoming increasingly complicated and confusing for investors and savers.”
Research by MetLife, surveying 107 advisers, reveals just 12 per cent would put their own money in the new Innovative Finance Isa. The advisers polled voiced fears the new Isa would encourage people to rely on P2P lending for their retirement savings.
Simon Massey, wealth management director at MetLife UK, says: “It is striking that financial advisers are not joining the rush to invest in P2P and are generally cautious about investing their own cash in [the products], which does carry risks.”
| Investing in ETFs via Isas |
Amanda Rebello, Deutsche Asset Management’s head of exchange-traded fund (ETF) distribution for the UK and Ireland, explains: “A lot of investors don’t know they can add ETFs to their stocks and shares Isas. They’re a straightforward and cost-effective way to get exposure to stocks and bonds markets. “Let’s say your aim is to minimise costs but have a buy-and-hold portfolio of international equities and bonds. There are a number of actively managed funds on the market which do this, but this involves paying active management fees. “If you’re happy to go down the passive route then you could get that global equity and bond exposure with just two purchases and at a potentially lower cost – the purchase of a global equity ETF and a global bond ETF.” Ian Peacock, head of UK and Ireland at IG Group, adds: “Individual stockpicking is in decline and instead investors are after a low-cost, diversified and transparent way to invest their money in financial markets. ETFs are well suited to these factors. “They offer a diversified and low-cost way to gain exposure to a basket of related assets in a single product. The expense ratio of investing in ETFs is on average far lower than the average fund. Furthermore, the performance of active funds is increasingly being called into question.” |
But other analysis on the Isa market highlights a potentially bigger problem, which is that people prefer to keep their savings in cash, rather than invest in stockmarkets.
BlackRock’s Investor Pulse research found that of those with an Isa, seven in 10 hold them purely in cash and less than one in five have a combination of a cash Isa and a stocks and shares Isa.
Alex Hoctor-Duncan, savings and investment expert at BlackRock, says: “Cash undeniably has a feel-good factor. But just having cash sat in either a bank account or an Isa will mean it will take us much longer to get where we want to be financially in later years.
“Almost a third of [retirees] would use their savings if their retirement income fell short. The question is, will those savings be worth enough after the effects of inflation?”
Whether the array of new Isa products will encourage people to invest their money, or whether the perceived complexity will just keep them invested in cash remains to be seen.
Ellie Duncan is deputy features editor at Investment Adviser
