On 19th March 2014, Chancellor George Osborne announced in his Budget a series of changes aimed at assisting and encouraging savers at every stage of their lives.
Perhaps the most surprising proposals that grabbed a lot of the attention were those relating to the way individuals access and utilise their defined contribution pension funds in their retirement. However, certainly not to be overlooked was the announcement of changes to Individual Savings Accounts (ISAs). Due to come into effect from 1st July 2014, these are: –
- The distinction between Cash and Stocks & Shares ISAs has been abolished.
- Increased flexibility on transfers between products.
- A significant increase to the annual subscription limit.
A new ISA product (NISA) has been introduced, offering investors greater freedom with regard to how to hold their funds and with a higher annual limit. This will obviously appeal to existing ISA investors but may also appeal to those able to take advantage of the removal of restrictions on accessing pension pots.
From 1st July 2014 the investment limit increases to £15,000, which may be held in any proportion between cash and stocks & shares. The revised limits can be summarised as follows: –
|
Stocks & Shares |
Cash |
Overall Limit |
|
|
ISA 6th April 2014 to 30th June 2014 |
£11,880 |
£5,940 |
£11,880 |
|
New ISA (NISA) * 1st July 2014 to 5th April 2015 |
£15,000 |
£15,000 |
£15,000 |
|
Junior ISA 6th April 2014 to 30th June 2014 |
£3,480 |
||
|
Junior ISA ** 1st July 2014 to 5th April 2015 |
£4,000 |
* From 1st July 2014 the overall NISA subscription limit for 2014/2015 will be £15,000, including anything paid into ISAs between 6th April 2014 and 30th June 2014.
** The increased limit applying to the Junior ISA from 1st July 2014 includes any subscriptions made between 6th April 2014 and 30th June 2014. The same limits also apply to the Child Trust Fund (CTF).
It is anticipated that with regard to future tax years the revised limits will be announced each Autumn, as is presently the case.
Greater Investment Freedom & Flexibility
As per the current rules, investors may subscribe their £15,000 limit as they choose, subject to a maximum of one cash NISA and one Stocks and Shares NISA within each tax year.
Existing ISAs held at 1st July 2014 will automatically become NISAs. Any amounts paid into a Cash or Stocks & Shares ISA since 6th April 2014 will count towards the NISA limit, with the potential to contribute further up to the £15,000 limit in 2014 / 2015. It will not be possible to open a further NISA of the same type until 6th April 2015. e.g. On 1st May 2014 Emma invested the maximum allowed, £11,880 into a Stocks & Shares ISA. From 1st July 2014 her subscription limit increases to £15,000 and subject to the provider allowing it she could pay an additional £3,120 into the existing account. Alternatively she could subscribe £3,120 into a cash NISA. If her provider imposes restrictions, she could of course circumvent this by considering transferring.
Merging ISA components will in theory mean investors could hold both cash and stocks and shares in a single NISA subject to the provider offering this. Savers may, however, prefer to hold separate accounts and the rules will indeed continue to permit this.
Those individuals aged between 16 and 18 will also have the potential to invest up to £15,000 into a NISA. However, this will only be into a Cash NISA. Although many 16 and 17 year olds are unlikely to have sufficient funds of their own to consider utilising this limit in full, gifts from grandparents could be considered. For example, this could be as part of their own succession / Inheritance Tax (IHT) planning, the child’s costs of going to university or perhaps as a contribution towards their eventual first step on the property ladder. Of course, due to the parental settlement rules, wealthy parents will continue to not be able to exploit this and sheltering more cash.
Qualifying Investments
Investments eligible to be held in a Stocks & Shares NISA is being expanded to include: –
- Certain core capital deferred shares issued by a building society.
- Certain securities, such as retail bonds with less than five years to maturity.
- Certain investments that don’t currently satisfy the ‘cash like test’ for a Stocks & Shares ISA – certain company shares, units or shares in a collective scheme and some types of insurance policy.
Additionally, cash held in Stocks & Shares NISAs will no longer need to be held for the purpose of investing in qualifying investments and any interest arising on this cash will not be subject to Income Tax.
Account Transfers
For the first time transfers will be permitted from a Stocks & Shares NISA to a Cash NISA, a feature that to date hasn’t been allowed under the current rules. Cash to Stocks & Shares transfers will also be possible, although this has been the case for some time. Transfers between NISA components can be made as many times as required. This provides investors with greater control over their investment approach and equally, if not more so, the investment risk of their portfolio.
The current rules requiring a current year ISA to be transferred in full while allowing previous years’ ISAs to be transferred in full or part, subject to the respective providers’ own rules, remain in place for NISAs.
Conclusion
Undoubtedly ISA savers, particularly those paying higher or additional rate Income Tax, will welcome the higher annual investment limit and greater investment flexibility. This may include those who have fully utilised their pensions Annual Allowance for the year or those that have insufficient relevant earnings to make further tax relievable contributions.
Individuals with Fixed Protection 2012 or 2014 who are prevented from making further pension contributions will be able to shelter further savings free of Income Tax and Capital Gains Tax.
Any new rules which prevent recycling of income into pension products close to retirement could also influence greater numbers investing in ISAs.