Now I have your attention.
As we rocket towards the end of the tax year on 5 April 2023, there has been a lot of talk around ensuring various tax allowances do not go unused. While it is possible to carry forward unused contribution allowances into subsequent tax years in the case of pensions, this is not true of individual savings accounts (ISAs).
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 2023 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 available is often higher. Alternatively, ‘stocks & 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 & 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 However, it is important to transfer funds from one ISA to another without withdrawing them, as if funds are withdrawn, they cannot necessarily be replaced without using up your ISA allowance.
Some ISAs (‘flexible ISAs’) do allow for funds to be withdrawn and replaced in the same tax year without the return of funds being considered ‘new monies’, which would use up some or all of the annual subscription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 and introducing special purpose schemes like lifetime ISAs (LISAs), which can provide for ‘bonuses’ if certain criteria are met.
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 likely 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 that 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 the time of writing (March 2023).
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 plc is authorised and regulated by the Financial Conduct Authority.