Nicer ISA

For decades now, successive Governments have aimed to encourage saving. Arguably it is very much in their interests to do so. People with savings, pretty much by definition, are less likely to run into financial difficulties. Or to put that another way, they are also less likely to need state benefits. In recent years, Governments have made particular efforts to encourage saving for retirement (“We’re all in!”). While pensions have been the most traditional form of retirement savings, NISAs may also be worth investigating too.

 

The Start of the ISA Age

 

ISAs were introduced way back in 1999. Then, as now, they essentially provided a tax-efficient wrapper for savings and investments. To begin with there were two kinds of ISAs: (1) A Cash ISA received the entire interest income from the cash deposits without any tax being charged. (2) A Stocks & Shares ISA was used for investments. The rules around tax were a bit more complicated but they were still very tax efficient.

 

People could choose to have one or the other or both. There was, however, a twist to the rules around ISA limits. Investors could choose to put their whole ISA allowance into a Stocks & Shares ISA. Alternatively they could choose to split the allowance between a Stocks & Shares ISA and a Cash ISA. Those who did so still received the full ISA allowance but there was a limit to how much they could keep in cash. Savers who simply wanted a tax-efficient savings vehicle, could choose just to have a Cash ISA. If they did so, however, they could only save the maximum permitted cash allowance. ISAs were intended as products for the medium to longer term so the limits referred to the total amount holders could deposit. In other words, if you withdrew money from an ISA you couldn’t just replace it.

 

ISAs In Practice

 

When ISAs were first introduced (financial year 1999/2000) investors could choose only to have a Stocks & Shares ISA in which case they could invest up to £7,000.00. Alternatively they could choose to have both a Stocks & Shares ISA and a Cash ISA, in which case they could invest £4,000.00 via the former and save £3,000.00 in the latter. Savers who only wanted a Cash ISA could only save up to £3,000.00. The limits and the ratios of Cash to Stocks & Shares changed somewhat over the years but the basic principles remained the same. Then on 1st July 2014, the Government introduced NISAs.

 

Having A NISA Is So Much Nicer Than Having An ISA

 

Fundamentally NISAs work the same way as the old ISAs. The Government used the introduction of NISAs as an opportunity to raise the deposit limits (to £15,000.00) but there is nothing particularly unusual about that. The headline change, however, is that the ISA allowance can now be used as the individual wishes. In other words, savers can now choose to use their entire £15,000 to hold Cash or in Stocks & Shares.

 

But Remember......there is a significant difference between the two in terms of risk!