How to make a million ... slowlyPosted on: 21 February 2014 by 50connect editorial
How the much-maligned ISA has shown that it has matured into the savings option of choice for older people.
It’s not normal Government policy to help create millionaires – and then let them enjoy the rewards of their efforts without the Treasury taking a single penny for its trouble.
The number of ISA millionaires is growing and will increase significantly if the stock market continues to recover and grow over the next few years.
ISAs have grown in popularity since they were introduced in 1999 as a successor to PEPs (Personal Equity Plans) and TESSAs (Tax-Exempt Special Savings Accounts).
In some ways, that is surprising. Your investment comes out of taxed income. If your ISA shares collapse, as many did during the financial chaos of 2008, the losses are yours and cannot be set against gains. Those with Bradford & Bingley shares in their ISA portfolio had to take the full hit when they were declared worthless!
Yet, such had been the success of the ISA that there were rumours of the Chancellor imposing a limit (£100,000) on individuals ISA holdings at the last autumn statement. That’s all it turned out to be, just a rumour. Many financial experts left us wondering why George Osborne would even think of imposing such a body blow to the savings culture.
Simple figures would appear to favour pensions over ISAs. Put £8,000 into your pension pot, and the tax man immediately adds another £2,000. There are further benefits through your tax return for higher-rate tax payers with a reduction on your tax bill of £2,000 or £2,500.
It appears a no brainer. Your 8K had become 10K and you get 2K tax relief back. Beyond the age of 55, you can take 2.5K tax free. You are then left with a pension pot of 7.5K. Take away the initial 2K tax relief and then the 2.5 tax free, that pot has actually cost you £3,500 – so you have more than double your money in double quick time!
That’s when the problems start, highlighted recently by the official announcement from the Financial Services Authority (FSA) that it is to investigate the way annuities are sold, to find out whether insurers are doing enough to encourage savers to exercise “open market options” at retirement. That means not accepting the first offer put to you – which is what six out of ten buying an annuity currently do!
Several national newspapers are claiming “victory” in this campaign to stamp out the annuity “scandal”, but investors had already voted with their feet. When financial advice suggests the best use of your pension pot is not to touch it as it can be passed on to your beneficiaries outside inheritance tax, there is something seriously wrong.
It appears that one of the best selling aspects of ISAs is that all the hard yards are done at the beginning. The tax has been paid, but once inside this savings wrapper, the investor can enjoy life without the interference of the Treasury or HMRC. The ISA is not subject to income tax or capital gains tax, during and after the event.
Also, in this era of red tape and endless form filling, the ISA almost stand supreme and alone in that its details don’t have to be declared on your tax return! The absence of paperwork is a huge bonus, especially if the ISA investor is an active trader in equities.
There are further benefits for those in retirement. As the income is not taxable, it does not count for age-related personal income tax allowance reduction; those aged 65 and over with incomes approaching £22,900 can lose their personal allowance.
Finally, where the ISA shines brightest for many investors, is that money remains yours, and yours alone, to do with what you will.
The cost to the Treasury of this ISA generosity in terms of tax reliefs is estimated at £2.2 billion.
There are two types of ISAs – stocks-and-share (2013-2014 limit is £11,520) and cash (£5,760). The total combined ISA investment each year must not exceed £11,520).
The total subscription limit was £7,000 from 1999 to 2008, then was raised by £200 for the next two years – although in 2009-10, the over 50s were allowed to put in £10,200, which became the amount for everyone the following year.
Cash ISAs have suffered with low returns since the 2008 recession – and there is little sign of rates improving dramatically. Some current two-year cash ISAs are offering little more than 2%; that appears little reward for locking your money up when rates may well rise towards the end of the period.
It is the stocks-and-shares ISAs that require more individual commitment as well as financial advice – and it is this investment product that is now rewarding those who have made a long-term commitment to the ISA.
At the end of last year, a staggering £442 billion was held in all ISAs. The most famous, and probably most successful ISA investor is John Lee, a former minister in the Margaret Thatcher’s cabinet in the 1980s who defected to the Liberal Democrats 12 years ago.
His political career may have been less than spectacular, but as an ISA investor, Lord Lee has few rivals. Lee’s ISA portfolio (and before that PEPS) is well in excess of £1million mark.
His book “How to Make a Million – Slowly” explains his philosophy: “My investment life has convinced me that successful investment essentially requires two things – common sense and, above all, patience.”
“As a nation we should be encouraging saving and investment; and ISAs are an excellent vehicle for the potential private investor.” Well, Lord Lee would say that, wouldn’t he – but he’s not alone. There are over 24 millions ISA investors in the UK…they can’t all be wrong.
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