Wealth Management Consultant, Andrew Goulter, takes a closer look at how ISAs can help you save for your future.
ISAs are wrappers in which cash and some forms of investment can be held and where returns are accrued free of tax. Any withdrawals from ISAs, whether capital or natural income, are also tax free. As such, it is often desirable to maximise funds held via these vehicles.
The maximum ISA subscription is £20,000 per annum and cannot be carried forward. This means monies need to have been placed into an ISA before 5 April 2025 or the allowance for the current tax year is gone.
In this time of higher interest rates, ISAs can be an attractive means of holding cash, as any interest earned will always be tax free. This can be especially true if the cash is held in a fixed term account, as the interest rate available is often higher. Alternatively, stocks and shares ISAs allow for investments to be held in a tax-efficient manner, whether these be self-managed or managed on your behalf by an adviser.
Cash ISAs can be transferred to stocks and shares ISAs and vice versa. It is also possible to transfer ISA funds between providers and this may be attractive if there is a particular investment you wish to hold in this way. However, it is important to transfer funds from one ISA to another without withdrawing them as, if funds are withdrawn, they cannot necessarily be replaced without using up your ISA allowance.
Some ISAs (‘Flexible ISAs’) do allow for funds to be withdrawn and replaced in the same tax year without the return of funds being considered ‘new monies’, which would use up some or all of the annual subscription allowance.
The Treasury has seemed keen to promote the use of ISAs, raising allowances over the years (at least until it was frozen at the current £20,000 in 2017/18) and introducing special purpose schemes like Lifetime ISAs (LISAs), which can provide a Government bonus of 25% on savings of up to £4,000 per year until age 50, if certain criteria are met – the fund being used for the purchase of your first home or for retirement purposes after age 60.
Further, there is a push for UK-based investment, with the proposals for the ‘British ISA’ following the announcement of the outgoing Chancellor Jeremy Hunt.
You can also open a Junior ISA (JISA) for your child(ren) or contribute to accounts set up for your grandchild(ren). While these are similar to an adult ISA, it is important to note that you can only invest up to £9,000 per tax year per child.
I often incorporate ISAs into my clients’ retirement planning as they can be particularly useful as an income source, whether by generating a natural income or by gradually depleting the capital value.
In either case, no tax liability would be generated, allowing for the funds to be sustainable for a longer period. Some clients see their ISAs as a means to defer drawing on their pensions. This might be to allow for the pension funds to be invested over a longer period and may accrue more in the way of investment returns. Alternatively, it might be to maximise the funds that can be left to the next generation, noting often pension funds are typically outside one’s estate and therefore free of inheritance tax.
The more funds are held via ISAs at or near retirement, the more powerful a part they can play in a wider, later-life income strategy. As such, looking to make regular ISA contributions from a relatively young age is usually wise.
For example, putting £200 per month into an ISA from age 35 could deliver a pot worth £102,103 by age 60, assuming an investment return of 4% per annum net of fees. If that pot were then to be drawn on at age 60, circa £4,000 per annum could be generated tax free without depleting the capital value
As with many financial products, ISAs typically form only part of the picture in retirement and they are often used to complement, or are complemented by, other types of vehicles.
With a wide array of investment options surrounding ISAs and with a multitude of planning strategies incorporating their use, it is important to be properly advised. We are always happy to have a conversation!
Content correct at time of writing (August 2024).
This article has been produced for information purposes only. With investments, your capital may be at risk and past performance is not a guide to future returns. Your investments can go down as well as up. ISA rules apply and may change. Mattioli Woods Limited is authorised and regulated by the Financial Conduct Authority.
