Max out ISA now, and in 2014/15, to minimise any raid by Osborne
Depending on which quarters of the mainstream media you believe, the future of Individual Savings Accounts is either pessimistic or positive, writes IFA Tony Harris of Contractor Money.
To explain, a respected broadsheet newspaper reported that a cap to these tax-free savings accounts has been explored by Whitehall and, worryingly for some contractors making use of them, in some considerable detail. But just last week, a tabloid claimed that such ISAs will next year be able to stash a record amount of cash.
You can set your clock by the rumour mill
What is undisputable is that every year in the run-up to the Budget and Autumn Statement (- formerly the PBR), the press starts the rumour mill relating to announcements that the chancellor may - or may not – make, which may – or may not – impact contractors.
Currently, and in light of George Osborne’s Autumn Statement on Dec 5th, the media’s focus has been almost entirely on ISAs – tax-free savings vehicles, popular among contractors looking to build a nest egg; finance a Plan B or simply stash their hard-earned cash away from HMRC.
ISA allowance set to rise to almost £12K
Looking at the historical influences on ISA allowances, we can predict with some certainty that the allowance will increase for the next tax year, as it has done in previous years.
Traditionally, this rise has followed the increase in inflation in the previous year and as such we would expect to see the annual allowance for 2014/15 placed just under £12,000.
However, it remains to be seen if this chancellor will sway from this well-trodden path, following his claim that there would be “no pot of money for tax sweeteners” on Autumn Statement day, as previously reported on ContractorUK.
Do ISAs face a new tax raid?
Getting rid of existing tax sweeteners is something Mr Osborne hasn’t spoken about, but some Treasury officials have, in the shape of a cap on the amount that can be held in an ISA over the lifetime of the investment. The idea of such as cap was reportedly floated in Whitehall because it apparently doesn’t like the rise of ‘ISA millionaires.’
Figures that have been bandied about in the press include a £100,000 lifetime allowance for ISA customers, but this would be severely limiting for such investors as it would only allow for around a decade of saving at the current annual allowance. If a cap was to be put in place, it would surely need to be higher than this threshold to allow continued investment.
Moreover, with the lifetime pension allowance set at £1.25 million for the new tax year (a reduction from £1.5 million currently), it seems that such a low allowance for ISAs would be out of proportion. It would also prevent the majority of investors from making the most out of their ISA allowance each year, which would be a very questionable move for the chancellor to make, not to mention an unpopular one.
Our view is that it seems unlikely Mr Osborne will commit to any ISA cap that could deter investors from saving at this time, particularly when the current annual limit is still relatively low in comparison with the proposed £40,000 annual allowance for pensions in the new tax year.
Equity or Cash ISA, what’s best?
Putting our crystal ball aside, we see that the appetite from contractors to make the most out of ISAs remains healthy. This is despite the rates available on cash ISAs still being stubbornly low, with the best rate available at the time of writing coming from the Post Office at 1.80%.
If as a contractor you need to have cash savings to hand for a rainy day, then it is important to review your ISA regularly in order to ensure you are getting the best return on your investment. Whichever provider you are with, or choose to move to, always read the small print so you know when the headline rate will drop. For example, the Post Office’s rate includes a bonus for the first 18 months, after which it falls to 0.80% and you can only withdraw funds twice each year. Enticed by this or not, if your current cash ISA is no longer competitive then you can switch it to a new cash ISA or an Investment ISA, without losing any of your tax-free growth by completing the ISA transfer paperwork supplied by your provider.
And with inflation currently sitting at 2.7% (September 2013), even this best buy rate of 1.80% from the Post Office isn’t keeping pace with inflation so, like many contractors are doing at the moment, review your overall portfolio, including your ISA usage.
If you are intent on achieving better returns from your ISA, then consider exploring an Investment ISA, as these typically offer the potential for higher long term returns. However, with these ISAs, we recommend that you evaluate and then stick to your attitude to risk when selecting funds, and suggest you review your asset allocation regularly to ensure your investment is performing in line with your expectations. Unfortunately, many savers find themselves with multiple equity ISAs gathering dust in long-forgotten funds, so it is certainly worth reviewing your investments to ensure they are working hard enough.
If the chancellor does boost the annual ISA limit, as we anticipate, then contractors would be wise to make use of the increased allowance. More immediately, ensure you have invested up to the current £11,520 limit this tax year, just in case the whispered-about cap on ISA investment proves to be more than merely fodder for the mill.