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ISA Simplification

by on 05·04·2016

Personal Equity Plans were introduced by Nigel Lawson back in 1986 to encourage equity ownership among the wider population. The idea was for a simple savings vehicle that people could easily understand but even in 1992 things started to convolute when single company PEPs were introduced with the original PEP called a General PEP. Since then, the PEP / TESSA / Maxi-ISA / Mini-ISA / CAT-ISA / ISA / NISA have followed the same path as pensions under successive UK Government regimes, with more and more versions.

Following the recent budget, we are now looking at six different versions of ISA so it seems like a good time to take stock of what is available: 

  1. Cash ISA - Simplest form of ISA, widely available to anyone over 16, which may become a foundation stone of a lot of people's savings portfolios, with the ISA limit set to increase from £15,240 to £20,000 from April 2017.
  2. Equity (Stocks & Shares) ISA - providing the opportunity for over 18's to take investment risk in search of higher potential gains. Individual Shares and Collectives make this an attractive proposition for most savers, utilising the maxim - growth and income paid tax free.
  3. Junior ISA (JISA) - Aimed at children under 18, with a reduced limit of £4,080. Allows parents, grand-parents, etc. to save or invest funds that the child then has access to from age 18. ***Note that a JISA can be held alongside a Cash ISA between ages 16 - 18, giving teenagers an increased ISA allowance of £19,320 (2015/16 and 2016/17) rising to £24,080 from April 2017.
  4. Help to Buy ISA - After an initial deposit of up to £1,200, the government boosts savings by 25% (minimum savings of £1,600 required before the minimum government bonus of £400 can be claimed). For every £200 saved, the government adds £50 (maximum bonus is £3,000). The bonus is available when the saver buys his or her first home with the solicitor/conveyancer applying for the government bonus at that time.
  5. Lifetime ISA - Not happy with NISAs and JISAs, now we have the LISA from 6th April 2017. Available to open between ages 18 to 40, any savings in a LISA before age 50 will receive a 25% bonus from the government. Maximum contribution will be £4,000 per annum. Positives are that it can be used to purchase a home (value up to £450,000) and accounts are open to individuals rather than one per home. Funds accessible (including bonus) from age 60. Negatives are if you access the funds before age 60 (and not for home purchase), the government bonus is withdrawn (and any interest or growth on this) and a charge of 5% applies to the fund. Maximised properly between ages 18 to 50, the bonus could be as much as £32,000. ***Note that a Help to Buy ISA can be transferred into the LISA from April 2017 or client can continue saving into both, but they will only be able to use the bonus from one of the ISA arrangements to buy a house.
  6. Innovative Finance ISA (IF ISA) - designed to allow investors (over 18s) to put money into a peer to peer (P2P) lending company. The funds are lent out to individual borrowers or small businesses offering an opportunity for better potential returns than on cash savings, but with less volatility than stock market investments. For example, ZOPA (one of the most established and largest P2P lending platforms) is projecting returns of 7.2% after fees and bad debt. These are supposed to be available from 6th April 2016 but to date, no major P2P platform has been authorised by the FCA to offer new accounts (some smaller ones do claim to have been authorised already - Abundance and Crowdstacker), so there is a question mark hanging over these. The full ISA allowance of £15,240 in 2016/17 can be used for the IF ISA and further funds can be transferred in from other ISAs. Lord Turner (former FCA chief) has cast doubts on the IF ISA, predicting huge losses for P2P lending platforms over the next 5 to 10 years and implying that IF ISAs could lose money, particularly as the IF ISA investments will not be protected by the FSCS.

Although there will still be one overall ISA allowance in each tax year, the ISA allowance can be split between Cash ISA, Stocks & Shares ISA and IF ISA at the clients' discretion.

Overall then, there will be at least 6 different ISA versions to consider for your clients and the need for advice is approaching 'pension' proportions. Made me smile to read about the Which report in October 1999 that slammed ISAs as being too complicated for savers back then.

Now that changes seem to be kicking in every tax year and with the ISA allowance increasing to £20,000 in 2017, the need for professional advice on the best way to use the tax-free allowance for individual savers and investors has increased significantly.