These days we often refer to our hard-earned savings as our nest-egg, and the recent rise in the ISA allowance gives additional incentive to encourage savings to grow tax-efficiently.
ISAs
On 6 April 2017, the ISA allowance rose from £15,240 to £20,000, giving a boost to savers struggling with continued low interest rates.
Depending on how much risk you’re prepared to take with your nest-egg, you have two options: The Cash ISA, which offers a low risk way to save and the interest is completely tax-free. Or the Stocks and Shares ISA, which gives the potential for a better return, but you will be taking more risk with your money.
Cash ISAs
Cash ISAs have similar features to savings accounts but the interest you earn is tax-free. You can open a cash ISA if you’re aged 16 or over and resident in the UK. There are a range of cash ISAs designed to meet different needs, so make sure you look at the features and benefits – not just the headline interest rate:
- instant access ISAs – ideal if you need to access your money quickly, but it will probably come with a lower rate.
- regular saver ISAs – you could get a higher interest rate if you’re able to pay a regular monthly premium.
- fixed rate ISAs are ideal if you have a lump sum that you can put away for a set term and may attract a higher interest rate.
Remember to check if your provider will charge a penalty for accessing your money if you need it at short notice.
Stocks and Shares ISA
If these benefits still don’t outweigh the chance of a better return on your money, it’s worth looking at a stocks and shares ISA where you can invest in a range of different investments including individual company shares, unit trusts, investment funds, government bonds and corporate bonds (providing you are 18 or over and resident in the UK).
Any gains you make on your original investment are protected from Capital Gains Tax and you don’t need to declare it on your tax return, although you could still have tax to pay within the fund you’re invested in.
Lifetime ISA
Adults under 40 can now also qualify for the Lifetime ISA. The maximum annual contribution is £4,000 to which the government will add a 25% bonus to contributions made before the holder’s 50th birthday (so a £100 contribution will become £125 in the plan). You can use the funds, including the bonus, to buy a first home at any time from 12 months of opening the account, or you can withdraw the funds tax free from age 60 for use in retirement.
If between April 2017 and April 2018 you need to withdraw money for any other reason, you must fully close your Lifetime ISA and you won’t receive the government bonus. What’s more, from 6 April 2018, the government will introduce a 25% charge for these withdrawals. The only exception is if you’re diagnosed with terminal ill health and have less than 12 months to live, you can withdraw all of the funds (including the bonus) tax-free and penalty-free, regardless of age.
The tax efficiency of ISAs is based on current rules. The current tax situation may not be maintained. The benefit of the tax treatment depends on the individual circumstances.Â
The value of your stocks and shares ISA and any income from it may fall as well as rise. You may not get back the amount you originally invested.
Although there is no fixed term you should consider a stocks and shares ISAs to be a medium to long term investment of ideally 5 years or more.
To find out more about ISAs and for help picking the right one for you, please get in touch.
