New Isas make it even easier to build a nest-egg
Cash accounts make sense for savers, but with interest rates low, it may be time to invest
Personal Finance Editor
Wednesday 18 June 2014
It’s just under two weeks until you have the chance to stash money away in so-called New Isas (Nisas). The savings schemes were trumpeted by the Chancellor when he announced his Budget in March. The headline change is that the amount you can save tax-free is increasing to £15,000 from £11,880.
But the big change is that they have become much more flexible. From 1 July you’ll be able to transfer cash from savings accounts to investments and then back again; up until now you have only been allowed to transfer one way.
As part of that, you’ll be able to keep your whole Nisa allowance in cash savings, meaning the limit will actually climb from its existing level of just £5,940 – half the total Isa allowance – to £15,000.
So Nisas should be considered by anyone who has cash on deposit. Why? Because paying tax on your savings seems a little silly if the government encourages you to avoid doing so.
If you’re a basic-rate taxpayer, the rate you can get through a Nisa is worth 20 per cent more than outside the tax-free environment. If you’re a 40 per cent taxpayer the rate is actually worth 40 per cent more.
So the companies that offer Isas and Nisas are expecting the biggest move to come from savers who are waiting until Tuesday week to transfer cash out of low-paying deposit accounts into slightly higher-paying Nisas.
The main problem is that, behind the Nisa hype, interest rates for savers are still lamentable. However, even though they are at record lows, things are getting better.
With inflation falling to 1.5 per cent, as revealed by official figures yesterday, there are more savings accounts that actually offer inflation-beating returns now than for a long time.
If you look at standard tax-paying accounts you wouldn’t think so. Analysis by Moneyfacts suggests that just 72 of the 619 in the market today negate the effects of inflation.
When it comes to Isas the picture is much more positive. More than half – 115 out of 215 – now offer rates that beat inflation. And there are likely to be better offers coming as Nisas launch on 1 July.
Yet millions of savers don’t use the tax-free accounts, according to research by NFU Mutual. It reckons as many as 12.5 million adults save or invest without making use of Isas.
“By not making use of an Isa, savers and investors could be giving money to the taxman unnecessarily,” says Sean McCann of NFU Mutual.
Meanwhile Fidelity suggests that savers who use their full Nisa limit could be Isa millionaires – with £1m sheltered from the tax authorities – in their 25th year of investing instead of 29 years with the current allowance of £11,520.
Of course that relies on markets and investments performing favourably, rather than low-paying savings accounts. And the new-look Nisas do offer a much easier way to start investing, in the sense that you can take money out of the markets and stick it back on deposit if you become worried about the risks.
“Investing in cash is your least risky option but no one ever became a millionaire by leaving their money in a cash account,” says Maike Currie, of Fidelity.
In fact, the firm has calculated that savers could have ended up with more than twice as much over the last decade in a stock market-linked fund than a deposit account.
It says that £15,000 put into the FTSE All Share index over the last 10 years would have grown to £35,218.50. The same £15,000 into the average UK savings account would have yielded just £16,582.65, a difference of £18,635.85.
That’s food for thought, but it’s worth bearing in mind that the best-paying savings account would have grown a lot more while a more risky investment fund could have done much more poorly.
The truth is that making use of Isas – and from Tuesday week Nisas – makes sense. The decision is whether to go into cash or equities.
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