Individual Savings Accounts (ISAs)
The government has always known it can be difficult to get people to save.
Over the years, therefore, there have been a number of products made available that offered tax incentives to encourage us to at least start the process of saving.
The ISA was first introduced back in 1999 and allows you to contribute up to £20,000 a year (tax year 2019/20) towards building your nest egg.
For cash ISAs, interest on your savings is received free of tax. For investments in stocks and shares, there is no further tax to pay on dividends received, nor on any growth achieved within the account.
Even after an ISA has been opened, you are not tied to that same provider forever. If they do not perform, they reduce their interest rate, raise their charges or you simply find another provider with more suitable options, you can transfer your existing funds. If this is done within the transfer rules, it will not impact your current tax year contribution allowance.
Stocks & Shares ISAs
Stocks & Shares ISAs are one of the most popular products for financial planning due to their multi faceted benefits. A Stocks & Shares ISA enables you to invest your money in the stock market to achieve high growth levels whilst remaining in a tax efficient environment where no tax is payable on income or gains from the portfolio. Your money is kept readily available for withdrawal if required, albeit we generally advise that capital is invested for at least 5 years.
A&J work closely with platform providers that operate easily accessible ISAs alongside any other products you may have, such as pensions or personal investment accounts. These platforms allow for straight forward administration and management of your assets.
Your annual ISA allowance of £20,000.00, for the 2019/20 tax year, can be split between your cash ISA and S&S ISA if you so wish, as long as only one of each is used within a tax year.
If you haven't yet used your ISA allowance for this year, get in touch with one of our financial advisers to explain how this could be beneficial to your situation.
Help to Buy ISAs
In the Spring Budget of 2015, the Chancellor, George Osborne, announced the introduction of a new version of the ISA - a Help to Buy ISA. This savings account has been targeted at first time buyers trying to save their deposit.
You can save up to £200 a month, plus start your plan with an initial, one-off investment of up to £1,200. For every £200 invested, a £50 bonus will be added to the value of your account, with a minimum of £400 up to a maximum of £3,000.
This means an individual saving £12,000 can have that value boosted to £15,000.
Couples saving for a deposit together can own one Help to Buy ISA each and therefore both receive a bonus. The bonus will be payable when that first home is purchased. Bonuses will be payable for the purchase of a house worth up to £250,000 across the UK, or £450,000 if the house is located in London.
In all other ways, the Help to buy ISA is the same as a normal Individual Savings Account.
The latest addition to the ISA fold is the Lifetime ISA. This plan is aimed at the under 40s and - like the Help to Buy ISA above - offers a bonus if you use the proceeds to buy your first home - OR defer taking proceeds until retirement and use it as part of your income planning.
You can put in up to £4,000 each year, until you’re 50. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
The Lifetime ISA limit of £4,000 counts towards your annual ISA limit, currently £20,000 for the 2017/18 tax year.
You can hold cash or stocks and shares in your Lifetime ISA, or have a combination of both.
To open and continue to pay into a Lifetime ISA you must be resident in the UK, unless you’re a crown servant.
If you have a Lifetime ISA and a Help to Buy ISA, you can only use the government bonus from one of them to buy your first home.
Unlike the Help to Buy ISA, though, bonuses for this product are added on a monthly basis (after the first bonus which would be added the following April). On the positive side, this means you can see the amount you are saving increasing with the money added by Government, which can prove to be a real motivation to keep going. Also if you do not use the proceeds for that first home, you have a second option of keeping them locked up to age 60. And not only still being able to earn those bonuses, but being able to do so on more money.
On the downside however, if you withdraw your money BEFORE you either buy a house, are terminally ill or reach retirement, those bonuses are taken away and instead you would be charged a 25% fee. And the calculation used to determine their value may result in you paying back more than was added as a bonus in the first place.
Note: the Lifetime ISA is a reasonably new product so rather than go into more details here, if you have any questions about the way they work and the bonuses they pay, we would recommend you give us a call to discuss further.
An account to help parents, grandparents and friends build a savings fund for children
Junior ISAs (JISAs) were introduced in 2012 and are designed to enable parents, friends and relatives to save money for the benefit of children.
The total annual contribution allowed per child is £4,368 (tax year 2019/20) and this can be invested in a combination of cash savings accounts and investments.
A JISA can be effected for any child under the age of 18 who does not already have a Child Trust Fund (the predecessor of JISAs) set up in their name – but the earlier it is started, the higher the likely final value will be.
Like adult ISAs, interest on any cash element will be received tax free. For investments, no further tax will be payable on dividends received, nor on any growth achieved by the underlying assets.
Up to the age of 16, the JISA is administered by the parents of the child and asset selection is their responsibility. However, the assets themselves are owned by the child.
At the age of 16, the child can take control of the account themselves – but they cannot actually withdraw any money until they reach 18.
Like adult ISAs, JISAs are available from a range of providers including banks, building societies, investment providers, friendly societies and stock brokers. The wide variety of providers now involved in this area also means you can access such accounts from as little as £10 a month, or an initial lump sum of just £100, with various options and incentives available to suit different circumstances.
At ages 16 and 17, a child can open an adult cash ISA in their own name at the same time as owning a Junior ISA, but money cannot be transferred between the two.
A Word About Child Trust Funds
Should you transfer an existing CTF into the newer Junior ISA?
Child Trust Funds (CTFs) were introduced back in 2005 and over 4.5 million were opened between then and 2012. Many parents may therefore have an existing CTF in place for their children and, until April 2015, there was no option to transfer that money over to their replacement, the Junior ISA.
That option is now available however, and may be worth considering. There is nothing inherently wrong with Child Trust Funds - they offer the same basic investment options for holders and allow the same amount of money to be invested each year; and both can accept money from not only parents but grandparents and friends as well.
The issue, however, is that Child Trust Funds were not widely offered by the various financial institutions, so competition over pricing and the range of investment options may not be as keen as it will now be with Junior ISAs. As they have now been replaced, over the next 12-15 years, they will becoming obsolete. The incentive for your provider to keep their rates and charges keen may therefore not be as great as it is for the now more widely available Junior ISA.