Today, I want to cover ISAs… simply because the new tax year for 2014/15 ISA contributions starts this week.
I’ve written before how great ISAs really are. You can buy any share you like (even AIM-traded ones now) within these tax-efficient shelters and all the gains you subsequently enjoy are FREE from capital gains tax.
In fact, any gains (or dividend income) achieved within an ISA do NOT even have to be reported to the tax man – which is another huge blessing.
And when you invest regularly for the long haul, your wealth can advance to substantial levels…
Indeed, the boffins at broker Brewin Dolphin say an investor using his full ISA allowance every year could become an ISA millionaire in 29 years assuming the investments grow at 5% per annum.
I reckon that 29-year timescale could be shortened dramatically, too. I mean, 5% a year is not that hard to achieve…
It’s only taken 15 years to rid ISAs of their complexity
Here is a summary of the ISA changes announced in the Budget and are set to become effective from 1 July this year:
- New £15,000 ISA allowance: The annual allowance – the amount you can invest each tax year within your ISA wrapper – increases to £11,880 on 6 April, and then to £15,000 on 1 July.
- Greater flexibility (1): You’ll soon be able to split your annual ISA allowance as you wish between a Cash ISA and a Stocks & Shares ISA. At present, you can save up to half the ISA allowance in a Cash ISA.
- Greater flexibility (2): From July, you’ll be allowed to transfer cash direct from a Stocks & Shares ISA to a Cash ISA and preserve the tax benefits. Right now you can transfer cash direct only from a Cash ISA to a Stocks & Shares ISA.
- Cash held in Stocks & Shares ISAs – now tax-free! You’ve always been able to hold cash in a Stocks & Shares ISA while you decide where to invest – but any interest on that cash was effectively paid net of basic rate tax. Under the new rules, you’ll be able to hold cash for as long as you like in a Stocks & Shares ISA – and interest will be paid completely tax-free!
- Junior ISAs: The annual allowance limit will be increased to £4,000 from 1 July 2014. (I’m hopeful Child Trust Funds will be amalgamated into Junior ISAs one day.)
It’s only taken 15 years since their introduction, but I feel this Budget has finally rid ISAs of all of their complexity!
(And thankfully the Budget did not introduce any ‘lifetime allowance cap’ on ISAs that currently penalise very successful pension investors!)
I can’t believe 4 times as many people prefer cash to shares
But even with the prospect of greater flexibility and the payment of tax-free interest, I do wonder if everybody is making the most of their annual Stocks & Shares ISA allowance.
I mean, stats from HMRC indicate 2,924,000 people subscribed to a Stocks & Shares ISA during 2012/13…
…while 11,682,000 people – or 4 times as many! – opened a Cash ISA.
Oh, and the figures have been heavily in favour of Cash ISAs for the last ten years.
I just can’t believe those 11,682,000 people could even consider investing another penny in a Cash ISA and leave it there for the long run
From a very quick trawl, the best Cash ISA deal with online access I’ve seen is a 5-year 3% fix through the Skipton Building Society. Withdrawals are not allowed and early closure results in a 240-day loss of interest.
In comparison, you can open a Stocks & Shares ISA and put your money in a bog-standard FTSE 100 index tracker such as the iShares FTSE 100 ETF. Buy that exchange-traded fund at the recent 660p and the trailing dividend income comes to 3.2%. So, higher than the Skipton.
Plus you’d enjoy:
- the prospect of the dividend income rising – I reckon aggregate blue-chip dividends have advanced about 7% during the last twelve months;
- the potential for a capital gain, and;
- the opportunity to sell and withdraw your cash at any time.
Sure, the value and income from shares is never guaranteed while fixed Cash ISAs give you certainty.
But right now, I would take the tracker’s 3.2% yield (with the opportunity for a rising income and capital) over a 5-year fixed 3% cash account any day.
What’s more, I’m convinced there are many individual shares that could trounce that tracker ETF and that Skipton Cash ISA over the next five years.
Until next time, I wish you happy and profitable ISA investing.
