It is not often the general public get excited by a Budget.
Okay, excited may be taking things a little far but Mr Osborne’s recent budget certainly ruffled a few feathers in the pensions’ arena and he is also trying to stimulate tax-efficient investing by way of the New Individual Savings Account – or NISA.
A brief history lesson before we consider the new regime. ISAs replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) and were introduced on April 6, 1999.
Two types of ISA were available – a Cash ISA and a Stocks & Shares ISA with the original total subscription limit being a measly £7,000 – £3,000 could be put into a Cash ISA and £4,000 into a Stocks and Shares ISA.
There were “Mini”, “Maxi” and TESSA-Only ISAs (TOISAs) from 1999 to 2008 also. A Mini ISA could hold cash or a single holding of shares while a Maxi ISA could hold cash and stocks.
Any UK resident individual aged 18 or over could invest in one Maxi ISA per year with both components which could be with two different providers if the investor wished.
TOISAs were created to allow the original capital (excluding interest) invested in a TESSA (up to £9,000) to be reinvested in a tax free form. ISA transfers were available from day one from Cash ISA to Cash ISA or from one Stocks & Shares ISA to another. The 2008/9 tax year brought a (welcome) change in allowing transfers from Cash ISAs to Stock & Shares ISAs – but not the other way round. CAT (which stood for “Charges, Access and Terms”) standard ISAs were around too in the early days but were discontinued by the Treasury in April 2005.
So who said it was only pension rules that were complex? This is by no means an exhaustive précis of the former ISA rules but these would have been complicated to many of us. And over-complicated given the small amount investors could pay in as the amount grew only gradually from £7,000 at launch to £11,520 for the 2013/14 year – an increase of 65 per cent over 14 years.
The ISA subscription limit for 2014/15 is currently £11,880 but this will rise to £15,000 with effect from July 1. This represents an increase of 30 per cent (from £11,520) in one year – well done Mr Osborne.
Not only has the subscription limit increased significantly but the rules of investment have been greatly simplified too. Arguably it is this latter change which is more attractive to investors.
Of course being allowed to invest more is great but it is the ease and simplicity of understanding the rules of investment which can appeal even more to investors. The detail. From July 1, 2014, a maximum of £15,000 can be invested wholly in cash or stocks and shares in any proportion the saver chooses in the New ISA (NISA) product.
For the interim period from April 6 to July 1, the ISA subscription limit is £11,880 of which a maximum of £5,940 may be placed into a Cash ISA.
From July 1, money held in a Stocks & Shares NISA can be transferred into a Cash NISA and vice-versa. Current year savings must be transferred in full, previous years’ savings subject to provider agreement.
Savers aged 16 to 18 will be able to subscribe the full limit into a Cash NISA from July 1, 2014 but are not permitted to open a Stocks & Shares NISA. A saver may only open a maximum of one Cash NISA and one Stocks & Shares NISA each year.
So the new rules are more generous and far easier to understand. With interest rates being where they are I am not sure too many investors would wish to transfer from Investment to Cash ISAs at present but there are always individual cases that may warrant such a move.
In spite of these positive changes, critics would argue that the new rules only benefit the wealthy as not many can afford to invest a £15,000 lump sum out of their net income.
The best interest rate for an instant access Cash ISA is around 1.75 per cent at present so this, especially when combined with inflation, looks unattractive to most.
Stocks and shares or Investment ISAs look more attractive in terms of possible growth. After an overall bull market of several years, there doesn’t seem to be much “low hanging Fruit” (i.e. easy money to be made) at present but out of the main asset classes developed equity markets and commercial property look a better bet than emerging markets and fixed interest.
As I have said before, a diversified approach will serve most investors better in terms of more consistency, peace of mind and less volatility.
* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull.