Don't neglect your Isas

This is traditionally the ‘fallow’ time for investors in Individual Savings Accounts (Isas). After the rush to buy an Isa before the end of the tax year in April they tend to fold their arms and forget about these tax-efficient investments until the season starts again next January.

In recent years even this limited season has become something of a damp squib, as many investors, discouraged by the removal of the juiciest tax breaks on dividends, saw little remaining incentive to place their fund purchases within an Isa wrapper.
Net purchases of Isa funds in April were £853 million, but this was overshadowed by net sales of £1.8 billion for funds as a whole, the bulk of which were non-Isa funds. The February figures made the point even more clearly, with net Isa sales of £88 million representing less than a tenth of the £973 million of net fund sales.
But Isas remain a very useful vehicle for building up a nest-egg over the long term and Gordon Brown’s final Pre-Budget Report as Chancellor confirmed that they are here to stay indefinitely. There is no Capital Gains Tax to pay on profits within an Isa and higher-rate taxpayers pay less tax on their dividends than they would outside an Isa.
Killik & Co, the stockbroker, has produced a mouthwatering calculation that a couple investing their maximum combined allowance of £14,000 every year could, assuming modest growth of 8 per cent a year, amass a sum of £1 million between them in 25 years. Since the money would be in their Isas, there would be no Capital Gains Tax to pay when they eventually cashed in the proceeds.
Malcolm Cuthbert, of Killik, says: “Isas have always been slightly ignored as long term investment vehicles and yet regular saving in such plans can produce a very sizeable investment that can complement a pension or other retirement funding.”

Comments

[Newton]

What most people do not realise is that corporate bond funds, whilst not the most exciting, offer tax free income if held within an ISA. For something a little spicier look at the unit trust sector 'UK Other bond', this includes funds which hold 20% in equities, but still qualify for tax free income within an ISA. Some have a very good financial history and would provide excellent income on retirement.

[Justin]

When is 8% growth per year for 25 consecutive years a modest amount?

[Ian Johnson]

One point frequently missed is the relationship between ISAs and pensions. This is mentioned in the article in that ISAs complement pensions rather than replace them though often they are reported as being part of the pension savigs package. Pension pots do not form part of the assets of the holder when it comes to the social security system whereas of course ISAs do. Your savings are counted if you apply for state benefits on the loss of your job, or onset of a disability or nursing needs in retirement.Your savings, including in ISas would be a disbenefit in those circumstances whereas your pension pot could be safely ignored.