What is the New ISA all about?
When most people listen in on the annual budget given by the chancellor, they are usually interested in things like whether the cost of petrol or alcohol is going up, or whether they can expect to see an increase in their benefits or get some extra help with the cost of childcare. In amongst all of these announcements changes to things like tax-free ISAs can be easily missed. But that is exactly what the chancellor announced in the budget for 2014, an aptly named ‘New ISA’ which will come into effect on the 1st of July 2014. So what is so different about this New ISA? Before we discuss that, let’s just remind ourselves of what an ISA actually is.
What is an ISA?
Isa’s were first introduced on 6th April 1999 and they allow you to save a certain amount of money each year free of income or capital gains tax. You may pay some tax on dividend income but that depends on your individual tax status and this does not affect the majority of people. Over the years the amount you can save in a tax free ISA has gradually increased from £7000 when they were first introduced to the current rate of £11,520. At present a maximum of £5,760 of this being held in cash and the rest could be placed in a stocks & shares ISA, or the full £11,520 can be placed into a Stocks and shares ISA. As you can see, for the average saver this may all seem a little complicated and perhaps even a little unfair for those who just want to save in cash and completely steer clear of the stock market, and the government seems to agree. That is why – starting on the 1st of July 2014 – the New ISA will come into force with a new set of rules aimed at bringing a fairer and simpler system into place.
Simplicity & Flexibility of the New ISA
The aim of the New ISA is to introduce a lot more simplicity and flexibility into how ISAs work and how you can manage them. There are at least 3 big changes that I feel should be highlighted, these being the increase in the amount of money that can be placed into a tax free ISA each year, the big changes regarding the amount of money that can be placed into each ISA type (Cash or Investment), and also the increased flexibility around how you can transfer money between your different ISA accounts.
Increased Subscription limit
When the New ISA comes into force in July of this year, the total tax free amount you can invest each year will jump from a healthy £11,520 to a sizeable £15,000. This increase in subscription limit should come as welcome news to those who are trying to build up a nest egg in this low interest rate environment, though most will probably feel that this is only very small step in the right direction.
Amounts you can invest in each ISA type
When you look at the current ISA limits, they do seem to work in a slightly unfair manner, at least if you only want to hold your savings as cash. At present you are only allowed to place £5,760 of your £11,520 yearly savings limit into a Cash ISA, the rest must go into a stocks and shares ISA. Under the New ISA framework not only does the tax free savings limit increase to £15,000, you can also split your full £15,000 allowance between a New Cash ISA and a New Investment ISA in any way you choose. You could place the full £15,000 into a New Cash ISA, place it all into a New Investment ISA or split the amounts to your own preference.
Switching money between New ISAs
New ISAs have been designed with flexibility in mind. From the 1st of July 2014 you can easily change providers, transfer money from New Cash ISAs to New Investment ISAs and vice versa, alter payment amounts, withdraw cash or close an ISA at any time. It is true that some of these features were already available but – under current rules – you are only allowed to make transfers out of a Cash ISA and into your Stocks and shares ISA and not the other way around, so the ability to transfer money the other way is a big change with New ISAs.
Important note: If you open a New ISA with a new provider and you want to transfer money into it, be sure to do so through your ISA manager or it may not count as a transfer and you could lose some of your allowance as explained in the video at the end of this post.
I already have an ISA, do I need to change anything?
No, all current ISA accounts will automatically change to New ISAs on the 1st of July 2014 and the new limits will apply. You may still want to review your current ISA interest rates though to ensure you are getting the best return on your savings.
For more information about the New ISAs, check out Scottish Friendly’s NISA Guide.