The popularity of Cash ISAs has reduced considerably over the past year as interest rates have fallen. Furthermore, the introduction of the Personal Savings Allowance from April 6th this year will see all interest paid gross by banks and building societies and the first £1,000 will be tax-free for basic rate tax payers (£500 for higher rate tax payers). For many savers the Cash ISA will no longer be necessary to shelter their savings from tax.
So should you be ditching your Cash ISAs? Not necessarily. For additional rate tax payers there is no Personal Savings Allowance and so Cash ISAs will still be valuable, saving tax at 45% on interest. For larger savers, Cash ISAs will also still have a place. If you have decided that the stock market is definitely not for you, you may have accumulated significant sums in such accounts. You will quickly exceed the £1,000 or £500 Personal Savings Allowance. And don’t forget that interest rates will eventually rise again. If we get back to the heady days of 5% interest rates the Personal Savings Allowance will only shelter £20,000 from tax for a basic rate tax payer.
In April 2017 the Lifetime ISA (LISA) will become available. Save up to £4,000 each year and receive a government bonus of 25%. You must be aged 18-39 to open a new LISA but may then carry on contributing (and receiving bonuses) until the age of 50.
LISA savings and bonuses may be used towards a deposit on a first home worth up to £450,000. Alternatively savings may be accessed completely tax-free from age 60 onwards. If savings are accessed before the age of 60 and are not used towards a deposit on a first home the bonuses (and any growth on the bonuses) are forfeited and there will be a 5% charge.
LISA will not be for everyone. The government bonus is very attractive but pension schemes offer similar (or better) incentives and are likely to be a superior option if employer contributions are available.
If you are investing for the longer term then you should consider some form of stock market investment. Other than pension funds, Stocks & Shares ISAs are the obvious starting point, allowing you to invest up to £15,240 in 2016/17 (rising to £20,000 in 2017/18) and pay no tax on income or gains. For shares held outside an ISA the new Dividend Allowance also means that the first £5,000 of dividends from shares will be tax-free. A further incentive for larger savers was announced in the Budget with Capital Gains Tax (CGT) rates being cut to just 10% for basic rate tax payers (20% higher rate).
In spite of ever growing complexity in terms of savings incentives and allowances there is no doubt that the government has now put in place a very generous package for those who plan carefully. From April 2016 tax payers will have:
a personal income tax allowance of up to £11,000
a dividend allowance of £5,000
a Personal Savings Allowance of up to £1,000
a Capital Gains Tax allowance of £11,100
an Annual Allowance for pension contributions of up to £40,000
an ISA allowance of £15,240 (rising to £20,000 in April 2017)
For more sophisticated investors, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) offer further attractive allowances and reliefs.
And next year LISA will join the party.
A maze, yes. A minefield, quite possibly! But plenty of scope for sound long-term planning with the right advice.