Over-50s gear up for tax-free ISA boost

With the limits on Individual Savings Accounts set to rise, it pays to look for the best possible homes for your cash.
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In less than a month, millions of savers over the age of 50 will receive a much-needed boost to their returns. From 6 October, the amount of money they will be able to pay into an Individual Savings Account (ISA) in a tax year will jump from £7,200 to £10,200.

They can invest an extra £3,000 into a stocks and shares ISA or up to £1,500 into a cash ISA and the rest into the stocks and shares element. If everyone in the UK aged over 50 were to do this it would mean an extra £63bn being sheltered from the tax man, according to Fidelity International.

While an increased tax-free savings allowance is great news for savers, there are fears that many will fail to take advantage of the new limits. Providers have been issued with guidelines stating that they don't have to inform investors of the increased limits or, indeed, offer access to the new investment limit before April 2010, when it kicks in for the under-50s. Also, while the bigger providers should cope fairly easily with the administrative side of the new regulations, others may struggle to administer two ISA limits.

"It would come as no great surprise if we saw a few providers having teething problems," says Michelle Slade, from financial information service Moneyfacts.co.uk.

As things stand, 6.2 million adults hold a savings or deposit account without having an ISA, and 1.7 million taxpayers hold shares or investment funds, but no ISA. This amounts to a wastage of £143m in tax, according to financial advice website Unbiased.co.uk. It adds that Britons are forking out £108m in unnecessary tax by failing to make use of their tax-free cash allowance. Shareholders don't fare much better with £35m lost by those who do not transfer their holdings into a stocks and shares ISA. The reason behind this wastage may well be a simple lack of understanding when it comes to what can seem a fairly complicated system.

The first thing to note is that the new allowance can be used to top up a cash ISA or a stocks and shares ISA holding. Investors who have already taken out a cash-based account this tax year have the option of topping up this to a maximum of £5,100. Any money not placed in cash can be used to invest in a stocks and shares ISA – up to a combined total of £10,200. There is no requirement to place the extra £3,000 in the same share, fund or asset class but it must stay with the same provider. Investors on a fund supermarket, though, can split their allowance between as many fund providers as they like.

Many providers will be poised to launch new products, hoping to attract the over-50s with higher-paying accounts. "We have heard from a few providers, including Barclays, Leeds Building Society, Yorkshire Building Society and Abbey stating that they are ready to take advantage of the increased limit for the over-50s. As we get closer to the deadline, it is likely that we will see more providers making moves to attract the additional money from savers," says Ms Slade.

The chief concern will be whether to stick the extra money into a cash ISA or take a gamble and put it all in a stock-market investment. Age and attitude to risk will always be the deciding factor, but experts argue that someone in their 50s has enough time before retirement to take some risk and ride out any blips in the stock market.

As for cash ISAs, at the moment, savers can get a best-buy rate of only 2.75 per cent from Intelligent Finance if they want instant access. Savers willing to lock their money away can get much better rates but risk missing out on improvements. Nationwide offers the best three-year fixed cash ISA at 3.5 per cent, while the five-year ISA from Leeds Building Society pays 4.6 per cent. With this account savers can take 25 per cent of their original investment without penalty, but, over this, lose 180 days' worth of interest for withdrawals.

Investors who plan to use the extra allowance every year could amass a tidy sum if they take a risk on an equity ISA. An investment of £250 per month could grow to £37,800 after 10 years – that's on top of the current ISA allowance, according to figures compiled by Fidelity International, based on a typical UK equity fund with an initial charge of 3.5 per cent, a growth rate of 7 per cent and annual fund charges of 1.67 per cent.

"With interest rates so low, cash does not look as appealing as it once did. Therefore, investors are being forced to consider more risk," says Adrian Lowcock from independent financial advisers (IFA) Bestinvest. "I would suggest investors invest in funds offering attractive interest with potential for growth. New Star UK Property, with a net yield of 5.9 per cent, is one. Legal & General Dynamic Bond fund also offers an attractive rate of 4.2 per cent net."

Other experts suggest investors take the opportunity to invest in a broader range of funds. Kevin Tooze, from IFA Equity Partners UK, suggests Jupiter Merlin's Income fund with top 10 holdings such as Artemis Income, ETFS Physical Gold, First State Asian Equity Plus 1 and Invesco Perpetual Income. "Over the past five years, the cumulative growth has been 36.8 per cent."

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