ISA allowance to increase annually
In his last Budget before the general election, Chancellor Alistair Darling announced that the ISA limit, set to go up to £10,200 for all savers from 6 April, will be linked to rises in inflation from April 2011.
Based upon the Darling’s estimated inflation rate of 2% for the next year, this means the ISA limit will be £10,400 from 2011/12.
Many industry experts welcomed the decision.
Richard Saunders, chief executive of the Investment Management Association (IMA), says: "The ISA is and should remain the key non-retirement savings vehicle for all. We therefore welcome the government's announcement that the limit will increase each year in line with inflation."
He adds that the IMA will shall continue to discuss with the government how it can build on the strength of the ISA brand and the simplification of the pensions landscape to create "a coherent savings scheme for all, providing instant access, limited access and retirement incomes."
Rebecca O'Keeffe, head of investment for Interactive Investor, says: "19 million ISA investors will be delighted that from April 2011 ISA limits will be indexed in line with inflation."
She also applauds the government's proposal to consider allowing investors to put alternative investment market (AIM) shares into their ISA portfolios: "ISAs are an incredibly valuable tax benefit and additional Treasury comments that it is consulting on whether to allow AIM shares to be ISA eligible is very good news too."
However, other commentators are unsure if the increase go far enough.
John Richardson, head of advice policy at Towry Law, says: “To really encourage the savings culture, the [ISA] limits need to rise more substantially and, in real terms, faster than in line with inflation. “
ISAs were first introduced in 1999 but there have been no substantial increases to the amount of money you can stash away in an ISA.
However, in his Budget last year, Darling announced that the amount of money you can put into an ISA each year will increase from £7,200 to £10,200 from 6 April 2010.
For people age 50 or over, this new limit became available from 6 October 2009.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.