So Much ‘NISA’ – an Introduction to the New ISA

In his 2014 Budget George Osborne delivered the biggest shot in the arm to DIY savers and investors in living memory

In addition to driving a coach and horses through the pensions industry and abolishing the 10% tax on savings Osborne announced the New ISA (dubbed the NISA) – a simplified tax efficient wrapper that allowed greater flexibility in terms of the combination of cash and stocks and shares that could be held – and increased maximum annual subscriptions which are £15,240 for the 2015-6 tax year.

ISAs are a powerful weapon in the DIY investor’s armoury and those that have been put off by the low rates of interest paid by Cash ISAs in recent years may decide that it is time to take advantage of the flexibility and increased range of investments available through a NISA.

‘ISAs are a powerful weapon in the DIY investor’s armoury’

Whilst returns on Cash ISA investments have been falling, trade body the Investment Management Association has identified that significantly more money has been invested in Stocks and Shares ISAs as investors seek higher returns.

Fully subscribed ISAs with returns compounded over a number of years can deliver a sizeable pot and many prefer the flexibility an ISA wrapper delivers as a vehicle for their retirement planning.

With effect from 1st July 2014 investors could transfer a Stocks and Shares ISA into a Cash ISA which meant that those that had previously plumped for the safety of a cash product could consider taking advantage of the potential for higher returns in the stock market, knowing they can transfer the entire amount to cash at any point in the future – converting a six-figure ISA into a tax-free income stream could be a very attractive option to supplement income in retirement.

In addition, the new rules gave stocks and shares investors even more flexibility on what they can invest in.

Under the rules investments such as short-term bonds or cash funds qualified for inclusion in an NISA and DIY investors could invest in very low-risk bonds or gilts, which may provide a better return on their money than cash, while also avoiding the need to transfer to a Cash ISA.

The Government also consulted on the admission of peer to peer loans to the list of NISA eligible investments and they will be eligible for inclusion in the Innovative Finance ISA launching in April 2016.

Cash ISAs will still have a role for savers needing an accessible and certain pool of money or saving towards a fixed financial objective and are also useful for older people looking to generate a tax-free income.

Those saving for children will appreciate that the annual subscription has been increased to £4,080 and overall, with the new rules effectively removing the need to choose between a savings or investment strategy, ISA investing has become far more attractive.

DIY Investor Magazine’s Guide to the NISA:

How is the New ISA Different to the Previous One?

From 1st July 2014 all existing ISAs and any future contributions came under the New ISA rules, which were more generous and more flexible than the previous ISA.

The annual subscription allowance increased by £3,120 from £11,880 to £15,000, and now £15,240, which can have a substantial impact on the value of an ISA over time.

Even without a provision for future increases in the allowance, investing fully into a NISA each year could result in a portfolio worth more than £250,000 in only 12 years.* which equates to an additional £50,000 in tax free returns compared with investing the previous allowance per year over the same period.

The NISA limit can be fully invested into stocks and shares, cash or any combination of the two.

*This figure is based on an investment return of 5% per annum after fees, compounded annually.

What’s the Difference Between Cash ISAs and Stocks and Shares ISAs Under the New ISA Rules?

Cash ISAs will still offer a rate of interest, often requiring you to ‘lock in’ your investments for a set period in order to receive the quoted rate. Stocks and Shares ISAs allow you to take control of where your money is being invested in line with your own risk appetite and financial objectives.

Although your capital may be at risk, if you’re saving for the longer term Stocks and Shares ISAs do have the potential to offer higher returns than saving through a Cash ISA.

Did Junior ISAs Change?

From 1st July 2014 Junior ISAs (JISA) annual subscriptions rose from £3,840 to £4,000, and now £4,080, with the ability to invest in stocks and shares, cash, or any combination of the two on behalf of a child.

‘New ISA rules are far more flexible’

The fact that anybody can contribute into a JISA account on behalf of a child makes it possible to collectively build up a significant sum for their future.

Investing £4,080 into a JISA each year would result in a portfolio valued at more than £100,000 on their 18th birthday, assuming an annual growth rate of 5% – a boon for those faced with tuition fees or trying to get on the property ladder.

Can I Still Transfer ISAs From one Provider to Another?

New ISA rules are far more flexible and transfers should be made within fifteen days; transferring previous tax year ISAs to a new provider does not count as a new ISA contribution, so if you have built up a number of ISAs with several providers over the years, bringing them together under one roof is an easy way to gain control and ensure they keep working in line with your objectives and risk appetite.

What Additional Investments Were Allowed From 1st July 2014?

• Certain Core Capital Deferred Shares issued by a building society
•  Certain securities, such as retail bonds, which have less than 5 years to run to maturity at the time they are first held in an account
• Certain investments that did not previously satisfy the current ‘cash-like test’ for a Stocks and Shares ISA – such as some company shares, units or shares in a collective scheme, and some types of insurance policy.
• Cash held in Stocks and Shares NISAs need not be held for the purpose of investing in qualifying investments. Interest arising on this cash is no longer subject to a flat rate charge of 20%.
• Peer-to-peer loans are eligible for the Innovative Finance ISA launching April 2016 and the Government is also exploring extending NISA eligibility to debt securities offered via crowdfunding platforms.