ISAs: Out With the Old; In With the New
The ISA deadline is almost upon us. Here's the scoop on recent reforms, and our thoughts on how to make the most of your ISA.
So, it will be a not-so-fond farewell to the complicated and much misunderstood “Maxi and Mini” ISAs and a welcome, with a sigh of relief, to a new, simplified regime that allows anyone over the age of 18 to invest up to £7200 over the course of the tax year with all returns on the investment exempt from any personal tax liability.
The major constraint that remains from the old rules is that there is still a limit on the amount within the ISA that can be held as cash; however, this has been increased from £3000 to £3600 for the new tax year. 16 – 18 year olds can invest in the cash element only. Otherwise, anyone who wishes to “mix and match” their ISA contributions between cash and stock market investments can still do so and, unlike under the old Maxi ISA rules, can choose different providers for the two elements. However, you still can’t have more than one stock market and one cash ISA in the same tax year AND, once you’ve invested, you can’t switch your ISA provider during that tax year.
Of course, many people will be asking the question whether anyone in their right mind would contemplate investing in stock markets today, even within the tax shelter offered by an ISA. There’s no question that these are turbulent and challenging times, where epithets like “crisis” and “meltdown” hit the news headlines daily to describe the state of financial markets. In this context, it’s worth remembering that, at similar points in the past whenever markets have descended into a tailspin, the best advice has invariably been, in the words of Corporal Jones: “don’t panic!” Most importantly, don’t let short term conditions – whether they be “highs” or “lows” govern your long-term investment decisions. Quite simply, if a long-term investment strategy inclusive of stock market investments was appropriate for your needs in the “halcyon days” before anyone had heard of “sub-prime crisis”, then it’s still appropriate today.
That’s not to say that all of your ISA eggs should necessarily sit in the stock market basket. The £3600 cash allowance allows you to get a decent rate of interest on your money, without incurring any tax liability, even if you’re paying tax at 40%. This can be especially worthwhile for shorter term (e.g. less than 5 years away) investment goals.
Also, don’t forget that you don’t have to invest in a stock market ISA as a single lump sum. In volatile market conditions, “spreading the risk” by drip-feeding your investment through regular monthly contributions can reduce risk and improve the potential return on your money. By investing monthly, you will take advantage of what is known as “pound cost averaging”. Effectively, this means that you will buy into your selected ISA fund or funds at varying prices during the year. In market conditions where prices are falling, this can be beneficial based on the simple principle that the lower the price, the more shares or units each contribution will buy. Of course, it’s not a one-way street; if prices rise consistently through the year, hindsight (always perfect!) will tell you that you would have been better off investing the full allowance as early as possible – but that looks like a bold assumption in today’s markets!
Finally, don’t forget there are still two weeks to take advantage of, or top up to, this year’s allowance of £7000 (£3000 in cash) under the old Maxi and / or Mini rules. Your financial adviser will be able to help you decide what’s best for you.
