Richard Troue, Head of Investments at Hargreaves Lansdown, asks, do you know how to make the most of your NISA allowance?
One of the best ways to maximise long-term savings is to make use of tax-efficient savings, including Individual Savings Accounts (ISAs). An ISA is simply a wrapper within which you can shelter your capital from tax – less tax means higher returns. If you had invested the full ISA allowance every year since ISAs launched in 1999 you could have sheltered as much as £139,080 from tax.
Why is my ISA now a NISA?
From 1 July 2014 ISAs became New ISAs, or NISAs, and a number of important changes come into force. The tax benefits remain as attractive as ever – you pay no capital gains tax and no further tax on any income – but NISAs are also simpler and more flexible than ever before.
The annual amount that can be saved is increasing to £15,000 from £11,880, it’s highest ever level. Whereas historically there were restrictions on how you could split your allowance between Cash ISAs and Stocks & Shares ISAs, now you can split your allowance as you choose.In addition, you can now transfer from a Stocks & Shares NISA to a Cash NISA, and vice versa. Under previous rules you could only transfer from a Cash ISA to a Stocks & Shares ISA. This removes one of the biggest barriers to transferring Cash NISAs to Stocks & Shares NISAs – you couldn’t transfer back again.
What type of investor are you?
Regardless of the type of investor you are it is important to save and invest as tax efficiently as possible. Fortunately, a wide range of different investments can be held in a NISA.
For investors who do not want to take any risk with their capital, or who have a time horizon less than 5 years, cash is the only realistic option. Although it won’t fall in value, it is not entirely risk free. Place £10,000 on deposit today and you should still get £10,000 plus interest back in five years’ time, but chances are it will buy fewer goods & services due to price inflation.
For cautious investors, funds which invest in a range of different assets are an option as the diversification tends to reduce risk. You can invest in equities, bonds and cash with smaller amounts in other assets such as commodities and foreign currencies.
Those seeking income might want to consider equity income funds. Income investors are attracted by the stable and potentially growing income stream dividends provide. Dividends can compensate for any short-term volatility in share prices and patient investors can reap significant rewards over the long term. Those who don’t yet need the income can reinvest the dividends to buy more shares, boosting the growth prospects.
More adventurous investors or those investing for the long term should consider a mix of funds investing in the UK and internationally. Look for fund managers who take a high conviction approach, investing in a relatively small number of companies.
The most important thing to remember is if you don’t use your 2014 ISA allowance it is gone for good, so always consider using your allowance to make the most of your savings.