Hello NISA – Want A ‘FREE’ £10,000?

In the past we have had PEP’s, Tessa’s, ISA’s JISA’s and now NISA’s. It seems every slight variation in rules relating to tax efficient savings plans is accompanied by a new acronym! It’s 27 years since Nigel Lawson, then chancellor, launched PEP’s as a way of investing for your future. 1987 was a very volatile year with Black Monday, resulting in falls to London Stock Market of more than 20%. People forget however, that the FTSE 100 actually ended the year at higher levels than it began even with the losses in October. It was the classic example of ‘holding your nerve’ when you feel least inclined to do so. The Bank of England base rate in 1987 was c. 9.5%!

The last 12 months have seen many significant changes to existing ‘savings plans’ rules. The headlines have often been grabbed by the pension changes, however there have also been changes to ISA’s – now referred to as NISA’s or New ISA’s…… Brilliant! However behind the acronym, there is now scope for individuals to save £15,000 per tax year in a far more tax efficient way than savings outside of an NISA. Within an NISA you can save in cash deposits or investments. Any interest from cash or dividends from shares, are paid to you free of tax and any profits are free of capital gains tax.

The maximum allowance of £15,000 is a big increase from the previous level of £11,880. You don’t have to save the maximum and you can save monthly, which equates to a significant £1,250 p.m. which for most people results in an “I wish” reaction! There used to be a separate limit for cash savings of £5,940 but this has been removed. It is also possible to switch from cash to investments and now vice versa.

It seems to be that there is very little sense in holding money in deposit accounts paying tax, when you have not used your ISA allowance. Neither is there much sense in having a portfolio of investments liable to tax, when they needn’t be.

So what about the free £10,000? Well this is simply the effect of saving within a tax favourable environment or not. Bob and Mike have both saved £100 per month since 1987 in a cash deposit environment, Mike as a basic rate tax payer has used the tax efficient route so has achieved a 20% increase in the returns he has made. Bob on the other hand was not motivated to use ISA’s.

Bob 4% p.a. Mike 5% p.a.
Amount Invested £32,400 £32,400
Final Value £58182 £68,312

It is important not only to use your NISA allowance, but also review what you have already accumulated. Cash ISA rates paid on the High Street are often very low on ‘old’ accounts. With Investments, it is important to make sure what you have continues to be appropriate in terms of the assets, you are comfortable with the level of risk, and the performance is still competitive. So a review can often improve things – even if you are unable to add more savings to your holdings at that time.

Author: Phil James, Grosvenor Consultancy Ltd

There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.

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