The amount that can be invested in an ISA has increased this tax year to £20,000 per person, but with the introduction of the Personal Savings Allowance how useful is this?
As a basic rate tax payer the Personal Savings Allowance enables you to earn up to £1,000 savings income tax-free. For higher rate taxpayers this reduces to £500. With current interest rates this means that significant sums can potentially be held on deposit without needing to utilise ISA allowances.
For many people, cash is their first thought when employing this important ISA allowance. This is because it is seen as a ‘no risk’ investment.
However, the impact of inflation on any investment return needs to be considered. You only need to look at one of the comparison sites to see that around 1% interest is all that is available for a standard cash ISA which is accessible in the short term. If you tie your money up for 5 years, this only increases to 1.65%. Whilst the latest inflation figures for March 2017, put annual inflation at 2.3%.
When the rate of inflation is higher than the interest available it leads to a reduction in the ‘real’ value of money, as it means that over time your money will buy less than it did originally. Therefore, with current available interest rates being so low can cash ISAs really be considered as “no risk”.
So, if you are only prepared to consider cash ISAs then the tax benefits of them may not be as advantageous as they once were. However, being able to invest up to £20,000 per person, per annum, where returns are free from income tax or capital gains tax remains undoubtedly valuable.
Since July 2014, you can allocate your allowance across cash, stocks and shares or any combination of the two. In addition, you can redistribute existing ISA assets between cash or stocks and shares by transferring existing savings from one to the other, and back again if you chose.
If you would like more information on ISAs, in all their forms, or to review your existing ISA savings and maybe consider how best to use this year’s allowance contact Duncan or Sally on 01925 210000 for an obligation free chat.’