Your guide to the 2017 ISA season
The so-called 2016 ISA season was declared as the ‘worst ever’ by many savers and investors, with rates seemingly at rock bottom and the stock market, at best, in a volatile state. As we find ourselves in the throes of this year’s ISA season, some will cite with an understandable degree of gloom that the landscape is in an even worse state, given that Bank of England rates have since plunged to new record-lows of 0.25 per cent.
However, while August’s cut to base rates was a bitter blow, we’d argue that there is plenty to be positive about in terms of the ISA market. On one hand, it was confirmed at the Spring Budget that the annual ISA allowance is set to increase by more than 30 per cent to £20,000 for the 2017/18 tax year.
But perhaps of more significance for this particular ISA season is the increased diversity of ISA wrappers at your disposal, which leaves you well placed to find the balance between maximising and safeguarding your savings and investments. Here we look at the three main ISA categories, and the merits of each in light of the respective status quo within each market.
The Cash ISA
A former favourite of the consumer, Cash ISAs have become a target of much derision over the last few years. Rates have absolutely plummeted – partially due to the fall of BOE rates, and also due to a lack of competition, with challenger banks not willing to deal with the red tape involved with setting them up - and with the arrival of the Personal Savings Allowance (PSA), the tax benefit of this wrapper has been nullified for basic rate and higher-rate taxpayers. As a result, many have opted for the superior rates offered by some high-interest current accounts.
However, despite the decline of the cash ISA, there still remain sound reasons for allocating funds to one. For starters, should your income increase such that you suddenly fall into the additional rate taxpayer’s bracket, you’ll lose the benefit of the PSA.
Yet even if this isn’t something which is a factor for you, there are other virtues to consider. For long-term savers, the benefits of consolidating your money into one high-rate cash ISA can allow you to make the most of compound interest, and you can sleep peacefully knowing that these funds will never incur the tax implications they otherwise might in a current account.
There is also usually good flexibility on offer in terms of transfers and withdrawals, while – if it is something you are conscious of – there is a one-off benefit whereby spouses and civil partners can pass on cash ISA savings tax-free in the event of death. And as an additional boost, this ISA category has also become far more diverse thanks to innovations like the Help-to-Buy ISA, and also the incoming Lifetime ISA.
The Stocks and Shares ISA
The days of stockbrokers or financial advisers being a mandatory, part-and-parcel component of investing appear to be dwindling. That’s not to undermine their importance. However, so-called DIY investing has rapidly grown in popularity, and one of the elements which has been at the heart of this revolution is the stocks & shares ISA.
There are both ISA specific and non-ISA charges associated with these wrappers – but ultimately all they require to operate successfully are a computer or smartphone, a bit of luck and a lot of nous. And the double gain of reduced (or zero) commission to stockbrokers and a tax shield on returns has only added to its appeal.
It is difficult to make sweeping generalisations and recommendations when it comes to stocks and shares investments over the ISA season, given the diversity of investment options, and varying performance thereof. But in terms of selecting a platform, we’d suggest considering the following:
- Value: The cheapest isn’t always the best, and it’s about combining price and service. Quality is worth paying for, but only if that’s what is delivered
- Investment options: Given the various dealing fees for shares, funds and trusts, you should first try to establish how you will invest, and then assess the profile of platforms in order to fit these requirements
- Tools and information: Does the platform offer informative advice, and are there any valuable portfolio building tools available?
- Charges: It’s not just about admin fees or dealing charges. Combining these with things like dividend reinvestment and regular dealing charges will give you the full picture
- Extras: Be sure to check the fineprint for any extra costs such as monthly investing discounts, dividend reinvestment fees, transfer charges and other associated fees
The Innovative Finance ISA
Surely the most exciting development of the 2017 ISA season has been the arrival of the Innovative Finance ISA (IFISA). For those frustrated by the poor returns of cash ISAs, unsure about taking on the risk and volatility of the stock market, or simply looking to diversify their investment portfolio, the IFISA represents a long-overdue middle ground on the risk-reward spectrum within the ISA framework.
The level of choice in terms of providers has been curtailed somewhat by the ongoing FCA authorisation and HMRC ISA manager approval process relating to peer-to-peer platforms, although Lending Works became the first major platform to receive full authorisation from the Authority, and, subsequently, to launch its new ISA. Since then, significant inflows of ISA lending capital have been forthcoming, suggesting the strength of demand for this investment product.
However, given that the annual ISA limit will be increasing to £20,000 from 6th April, and that many savers and investors will have already used most (or all) of their allowance for 2016/17, arguably the biggest surge of the ISA season will occur once the 2017/18 tax year begins. And as peer-to-peer lending’s reputation for reliable and lucrative returns continues to strengthen, it would seem that the IFISA is well placed to capture a high volume of this increased ISA investment from savvy UK consumers.