Under-performing ISAs get a kick to become NISAPosted on: 09 July 2014 by 50connect editorial
Older savers get more good news after improved Pension regulations and stronger National Savings Pensioner Bonds - the New Individual Savings Account is about to take centre stage.
It appears that savers are now spoilt for choice. After several years of scratching their heads and wondering whether the mattress or the piggy bank would bring the best return, the saver has some real options at last.
It used to be buses that failed to appear for ages before suddenly arriving in clusters. Kicking your heels at a bus stop has been nothing compared to the agony savers have gone through during the recession since the financial crisis of 2008.
That is all changing as improved Pension regulations, new ISAs, Premium Bonds and National Savings Pensioner Bonds offer real opportunity. This week it was the turn of the NISA (New Individual Savings Account) to grab centre stage.
Historically low interest rates have enabled borrowers to survive and pay their mortgages; those relying on their savings have seen returns plummet, also to historical lows.
Many people – those with mortgages and savings – win a bit, lose a little. Those just borrowing have enjoyed the benefits of an unchanged Bank of England base for over five years. In April 2008, the base rate was 5%; by March 2009 it had fallen to 0.5%, where it has remained ever since.
Older savers bore the brunt of the economic downturn
Savers, especially those in or approaching retirement who had paid off their mortgages and were debt-free, have faced the full force of the consequences of the financial sector in chaos and the government measures implemented to recover stability. Even the weekly dose of “record house-price rises” offered little day-to-day consolation.
Wherever they turned, wherever they put their money, returns were minimal, unless they took risks – which is not a sensible strategy for those of pensionable age.
It has also been a tough time for the Independent Financial Adviser who specialises in savings. Explaining to clients who have been used to a 5% plus return on basic saving accounts that those days are long gone and not likely to return is never easy.
Those meagre returns explain the popularity of the offset mortgage in recent times. The mortgage loan is linked to a savings account. Money in that account is “offset” against the mortgage at the same rate of borrowing.
If a customer has a £100,000 mortgage and £50,000 in the savings account, then the borrower has two choices. They can either just pay interest on the remaining £50,000 thus reducing the monthly payments – or pay the full amount and reduce the capital sum borrowed.
The offset mortgage rate could be 4.25%, so that is the savings rate. Additionally, because it is “offset” there’s no tax to pay which makes it an attractive proposition if you pay 20% tax, let along 40% or 45%!
When times are tough, the reduced payment is an attractive option; when financial conditions improve, paying the full monthly amount quickly reduces the repayment period.
Feast or famine
Savers finally saw light at the end of the tunnel during George Osborne’s Budget speech in March when the seven-year famine became a feast. Most of the pension changes will come in next April after the Pension Bill has gone through Parliament.
The chancellor also increased the maximum amount of Premium Bonds that individuals can hold. On June 1st the limit went up from £30,000 to £40,000; during 2015-16, it will rise by another 10K. From August, there will be two £1million monthly prizes, not one – although the minimum prize remains at £25.
The new Pensioners Savings Bonds from National Savings & Investments will be available from January 1st 2015. To qualify, you must be 65 or over and there will be the choice of one-year and three-year bonds, with a maximum investment of £10,000 per person, per bond.
It will be first come, first served as NS&I is “only” issuing £10billion worth of bonds. Interest rates will be “marketing-leading” and announced this autumn. Please note that returns will be subject to income tax at your nominal tax rate.
Out with the old ... in with the new
That the bonus of NISAs. Returns are tax free. From the start of this month, the NISA limit was raised to £15,000; and, crucially, savers can split their subscriptions however they want between cash and stock & shares. All existing ISAs automatically become NISAs.
Junior ISA limits have increased to £4,000 each tax year.
Even during the recession, ISAs have continued to be popular, even though their “tax-free” status means that stocks & share losses cannot be claimed back. When the stock market collapsed in 2008, many had little option but to hold on and wait for better times and recovery.
Around 23 million people, about half the UK’s adult population, has an ISA account and there are many ISA millionaires. Treasury figures show that ISA accounts have been most popular in the South West of England (over 50%) with London the smallest proportion (42.5%). Not surprisingly, the size of holdings increased with age.
Not that there is any real sign of any significant increase in ISA cash savings rates, around 1.5%, but the Budget changes means saving is a much more competitive market in terms of alternatives, and the cash ISA market will need to up its game if it wants our hard-earned cash.
There is some fine tuning NISA-wise that the Chancellor has to do, as pointed out by Richard Dyson in the Daily Telegraph’s Your Money. Property, shares and cash can all be left to your spouse without the taxman being notified – not your ISA!
The assets remain, but the very purpose of the saving scheme – its tax-free status – is lost! A savings product that does not have to be recorded on the tax return suddenly requires attention. This may be down to the wife who has never filed in a tax return!
This could be a problem that your IFA will show how best to resolve, as well as indicating which of these many saving opportunities suits you, your family and situation – and time of life.
It’s been a long time coming for savers, who have felt themselves side-lined and ignored in the desperate search for answers to solve the economic problems. They have been patient, which is the nature of savers – and now they deserve to start reaping the rewards and reasonable benefits of their prudent nature.
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