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THE INVESTOR
S
avers and investors have new
nancial planning opportunities
following this year’s Budget,
in which the chancellor changed
the rules for Individual Savings
Accounts (ISAs) as well as reducing
restrictions on taking pension bene ts.
A key change is the increase in the annual
ISA allowance by more than a quarter, from
£11,880 to £15,000 per adult.The old
distinction between Stocks and Shares ISAs
and Cash ISAs – where the maximum annual
subscription had been restricted to £5,940
– has also been removed.
The new rules of the‘nicer ISA’, as it has
been dubbed, mean that couples will now
be able to shelter up to £30,000 a year from
taxes by using both their annual ISA
allowances – a signi cant sum and one that,
invested wisely, can be a key component of
long-term nancial planning.
ISAs are very straightforward to operate.
There is no need to declare investments held
in them in SelfAssessment tax returns, nor is
there any further tax on income or on pro ts
when the funds are withdrawn. Of course,
ISAs do not o er any protection against
InheritanceTax; planning for that must be
done separately.
A further advantage is that there is no
minimum period for which ISAs must be held
to earn their favourable tax status.The funds
within them can be used for any purpose,
from paying school fees to covering the cost of
care for elderly parents, as well as building up
a portfolio for retirement.That makes the ISA
a exible tool for use in medium- and
long-term nancial planning objectives.
Being able to save more than two and a half
times as much cash in an ISA nowmay sound
tempting as it provides con dence that there
will remain £1,000 to withdraw for every
£1,000 deposited. In reality, however, the
returns on cash savings are currently not
su cient even to protect the value of the
investment from being eroded by in ation:
in ation as measured by the Consumer Prices
Index was 1.5% in May but only just over 50%
of ISAs which are wholly invested in cash o er
an interest rate above that
1
.
The history of stock market returns also
strongly suggests that cash savings are unlikely
to produce the highest returns over the
medium to long term. For example, according
to more than a century’s analysis of investment
returns, shares did better than cash on 75% of
all ve-year periods between 1899 and the end
of 2013.That suggests that ISAs invested in
shares tracking a broad measure of the market
would have beaten ISAs invested in cash in
three out of four periods, if they were held for
a ve-year term.
Parents considering how to invest Junior
ISAs – for which the maximum annual limit
rose from £3,840 to £4,000 on 1 July –
might be interested in even longer-term
performance.Where investments were held
for 18 consecutive years since 1899, shares
beat deposits 99% of the time
2
.This re ects
the fact that, while share prices can be volatile
in the short term, over the medium to long
term they usually make progress.
One of the basic rules of investment is that
building a diversi ed portfolio, whether
geographically, by type of asset or by strategy,
helps to iron out the peaks and troughs and
produce smoother returns.The increase in the
ISA allowance should make it easier to invest
across a range of asset types each year.
Because there are no restrictions on the age
at which ISA withdrawals are made – you can
take 100% of these funds whenever you like
– they can provide a exible addition to
pensions for retirement funding. For many
investors, a combination of both will meet
long-term nancial planning objectives.
The Budget also proposed removing
important restrictions, which are expected to
take e ect fromApril 2015, on how people
spend their retirement funds. Under the
proposed changes, everyone aged 55 or more
with a de ned contribution pension – which
includes all personal plans, including SIPPs,
and rising numbers of occupational schemes in
the private sector – should be allowed to
withdraw as much as they like from these
OPINION
OPINION
ANALYSIS
Following some of the biggest ever changes to the rules on ISAs and pensions,
investors need to take advantage of the new planning opportunities available
By Ian Cowie
