Inside track

Given the tax year end is nearly upon us, it seems sensible to bring to your attention one of the many tax shelters that are still available until April 5. ISAs were introduced 10 years ago to replace PEPs and TESSAs and are a tax wrapper in which a number of different investments can be held. Savers who have made full use of their annual allowances every year since then will have sheltered £73,400 (including the new 2009/10 allowance) from the taxman according to Moneysupermarket.com
The tax savings offered by ISAs are significant. For those paying tax at the basic rate, you would usually pay 20 per cent tax (2009-10) on savings interest, while higher rate taxpayers would generally pay tax at 40 per cent. People who pay the ‘saving rate’ of tax for savings would pay 10 per cent tax on savings interest. In 2010-11 some investors will be paying as much as 50 per cent on their savings.
ISAs therefore represent an extremely tax-efficient way to save and invest for the future and form the firm foundation of any long term investment plan. They are a useful short or medium term account for cash, and offer an easy route to the equity markets. However, you should bear in mind that the favourable tax treatment given to ISAs may not be maintained in the future as they are subject to changes in legislation.
The rules for investing in ISAs are relatively simple.  They are available to almost anyone who is 18 years of age (16 for a cash ISA) and a UK tax resident.

The tax savings offered by isas are significant

The over 50s now have the chance to top up their Individual Savings Accounts (ISAs) six months ahead of the rest of the population following new measures introduced in the Budget earlier last year. Since 6 October 2009, savers over 50 years old are able to invest a maximum of £5,100, instead of the previous £3,600 in a cash ISA, and £10,200 in a stocks and shares ISA (investors cannot invest more than £10,200 in total). Therefore given the challenge of protecting your income and capital from taxation it is important to make use of your annual allowance as ISAs offer a generous tax break. That said millions of savers fail to do so – and if you don’t use it, you lose it. So with the new allowances available for the over 50s and increases for all coming in, now represents an excellent time to review ISA investments.  With the current low level of interest rates, it is important for people to consider the suitability of their existing cash and stocks and shares ISAs. For people looking at the long term, equities historically outperform cash although the last two years have shown us that they can be volatile too. So while a stocks and shares ISA is generally the better option over the longer term, cautious investors or people looking at the shorter term may prefer a cash ISA. 
To add context to the different types of investment available look above at the relationship between equity, property, gilts and cash against one of the biggest challenges, inflation. Here you can see despite the fluctuating returns had by many investments, equities have still delivered a resounding margin above other assets over the long term but all have delivered over the inflation run rate. Just think what your returns would have got had you deducted taxation.
The flexibility of ISAs allows people to transfer cash ISAs to another ISA manager, either into another cash ISA or a stocks and shares one. Stocks and shares ISAs can be transferred to another ISA manager, but only
into another stocks and shares one – you can’t transfer stocks and shares ISAs to cash ones. Investors can transfer some or all of the money saved in previous tax years – as well as the current one – without affecting their annual ISA investment allowance. These transfers must be the whole amount saved in that tax year in that ISA up to the day of the transfer.

To receive a free guide produced by St. James’s Place Wealth Management, contact Andrew David Associates of the St. James’s Place Partnership on 01202 862340 or email andrew.david@sjpp.co.uk

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