It's official – the NISA is with us. This new ISA (or even super ISA in some circles) sees the tax-free limit raised to £15,000 and the rules surrounding cash and stocks & shares ISAs being relaxed, offering savers extra flexibility when it comes to making their investment.
It's welcome news for many as it means far more of your hard-earned cash can be kept away from the taxman, offering the chance to build up a nice (and entirely tax-free) nest egg. It gives you a greater level of freedom in deciding how to spend your allowance too, while you're free to transfer your subscriptions between cash and stocks & shares however you wish.
So, will you be making the most of it? Hopefully, yes – but it seems that a worrying number of people won't be. Analysis from financial services firm True Potential LLP suggests that the changes may not have a significant impact on the market, particularly given that a third of those surveyed had never heard of NISAs and 38% wouldn't be using any part of their new allowance.
In fact, just 16% will be more likely to save as a result of the changes and only one in ten will invest the full £15,000, while 44% intend to invest in cash alone. But, there are concerns that those who do won't actually be benefiting to the full extent, as to really make the most of the changes it's important to make your investments wisely.
Putting your entire £15,000 allowance in cash, for example, may not be the most viable decision if you're after the best returns – according to Daniel Harrison from True Potential LLP, "if savers use their NISA allowance to invest in cash alone, their savings will in almost all cases reduce in value".
This is because, generally speaking, stocks and shares ISAs can offer better returns than their cash-based counterparts. Figures from the Investment Management Association (IMA) back this up, with calculations showing that if savers had invested the full £15,000 in an equity fund in the IMA UK All Companies sector over the last 15 years (since the ISA's launch), the average return would have been £480,000 – compared to £275,000 in a tax-free cash ISA. Even more modest savings of £200 a month would still have shown measurable growth in a stocks and shares ISA, resulting in a value of £77,000 compared to £44,000 in a cash ISA.
It isn't hard to see where the difference in returns could have come from when you look at average savings rates across the ISA range. Figures from Moneyfacts Group show that the average variable cash ISA currently offers just 1.21%, a drop of 0.05% in two months alone, while the typical one-year ISA pays 1.48% – an even steeper fall of 0.10% over the same period.
Looking at it that way, there's clear cause to give stocks and shares saving a try, particularly given the new flexibilities which would mean you could put your investments back into cash should you change your mind. Read our guides on stocks and shares ISAs to see if they're right for you.
For those that would prefer to stick with the security of cash, however, it's important to not be put off. The returns might be slightly less than with stocks and shares but they could soon add up, and any form of saving should be readily encouraged – particularly if you can get those returns tax-free.
"Whilst low rates can't be anything but disappointing for ISA savers, do remember to use as much of the entitlement as you can," said Sylvia Waycot, editor of Moneyfacts.co.uk. "And, if you're worried about getting locked into a long-term fixed rate [with the prospect of a BoE rate rise imminent], keep your savings more liquid in a shorter term – the important thing is it must always be within an ISA wrapper."
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