A recent Government report highlighted that, excluding the Junior ISA, we have approximately £500bn invested in ISA tax wrappers (1). It works out that on average £31.25bn has been saved each year. With that kind of investment consumers could buy Walmart (twice) and Apple (once) and still have some serious change (2).
To put that into context, only six US companies have had market capitalisation (worth if you buy all the shares) of over £345bn.
So, what is an ISA?
An ISA is a tax wrapper. Think of it as a bag where you can hold all your investments and gain tax breaks.
Pensions are another type of tax wrapper, and together with ISAs, are the two schemes the Government has focused on. In fact, tax wrappers have been used as a political tool to either gain popularity or provide cash for the Treasury.
We believe the Government has focused on these two areas because of the consumer’s love of the ISA and to make pensions simpler, flexible, allow people to save more and reduce the funding gap (the difference between the cash available and the cost of retirement).
With pensions the Government took a big step by introducing Auto Enrolment. This means that when you are employed you are automatically enrolled into a pension scheme and allows you and your employer to contribute towards your future retirement cash needs.
The introduction of pensions freedoms last year has provided more flexibility, but it is important to be aware that more tax could be payable if you’re not savvy with your decisions.
It pays to take advice in this complex environment, especially as the Government is set to launch a second hand annuity market that will liberate more tax for the treasury.
Before 1999 we had the Personal Equity Plan (PEP) and those of us old enough to have some money to put into this tax wrapper will remember. Unfortunately, this writer was in his 20s and a ‘heavy social life’ won out over financial security!
The PEP was replaced by the ISA and we have been in love with them ever since.
So, why do we love the ISA?
The core of the ISA is that you get tax-free returns, so if your investment grows you don’t get taxed. You can also make tax-free withdrawals and an annual investment allowance of £15,240. This means a couple can invest £30,480 per annum and enjoy all the benefit mentioned above.
Changes over the years have made the ISA more flexible. On death a surviving spouse can inherit an ISA and add it to their ISA while maintaining their own allowance.
You can also withdraw half and then reinvest back in as the rules allow you to reset the allowance. Slightly technical, but many people are unaware of some of the things you can do.
We also saw the introduction of the Junior ISA (JISA) in 2011 for those budding investors under 18. This is on top of a tax wrapper that parents and grandparents have, which allows them to invest money that children can only access when they are 16, as well as be used for efficient inheritance tax (IHT) planning.
With annual investment ISA limits set to rise to £20,000 from April 2017, the introduction of the Lifetime ISA and the launch of the Help to Buy ISA in December 2015, there are myriad benefits, but perhaps some complexity when making decisions on what the best tax wrapper is for you.
Tax wrappers are one thing, but underlying investments can be an even more complex decision for the consumer. It’s all well and good having a tax efficient investment strategy, but if decisions are made that mean your ISA or pension does not perform in conjunction with the risk you are willing to take, your capacity for loss and your short and long term objectives as an individual or family, then tax efficiency is probably the least of your worries.
We’re almost halfway through the financial year, so it’s important to be getting the most from your tax efficient savings and investments now.
Joined up thinking, understanding and informed decision making are what financial advice is about and the people advising you should be working on your behalf.
- FT Adviser – Alternative ISAs: a lifetime love affair? – Accessed 18th August 2016
- Investopedia – Apple? Google? Tesla? Which will be the first to reach a $1 trillion market cap? – Accessed 18th August 2016
Last modified: June 10, 2021