Reasons to be cheerful as 6 April approaches
It is less than a week before the new tax year kicks in. For savers, 6 April will not only herald the start of a new tax year and fresh tax-friendly allowances but a sparkling new pensions dawn.
Without being over-dramatic, exciting times - and opportunities - lie ahead for those who wish to either accumulate long-term wealth or take control of their finances in retirement. Certainly, I haven't been so excited on the savings front since Personal Equity Plans came on the scene in 1987.
The main opportunity is a result of new rules governing how those aged 55 or over can access their pensions. From 6 April, no longer will so many people be railroaded into buying an annuity with the pension they have built over their working lives - an annuity often representing poor value and sometimes being a woefully inappropriate option.
Instead, they will be able to draw down money from their pension - over and above their right to tax-free cash - as and when they wish, subject to paying tax on it at their highest marginal rate. The options are wide ranging.
So, for example, they could buy an annuity with part of their pension, maybe to cover the cost of essential household bills. The rest they could then keep invested, drawing on the growth or capital from time to time for discretionary spending on holidays or a new car. Or they may wish to keep their pension fund intact until such time that they need to access it.
Alternatively, they may decide that guaranteed income is a must, in which case an annuity will be the best option - provided, of course, it takes into account their marital status and any health issues they may have (poor health results in higher annuity payments).
In all this pensions excitement, it is easy to forget that between now and 5 April - and then 6 April and beyond - tax-friendly savings opportunities also exist for those intent on building wealth. They come in the form of the revamped Isa.
If you haven't already tapped into your Isa allowance for this tax year, you can invest (or save) a maximum of £15,000 between now and 5 April - £30,000 per married couple. If you have children, you can also put a maximum of £4,000 per child into a Junior Isa. And if these allowances aren't enough to sate your appetite for saving, you can invest a further £15,240 in the new tax year - and an additional £4,080 into a Junior Isa per child.
What is now so appealing about Isas, apart from the fact all proceeds are tax-free, is that they have become far more saver-friendly. All the previous rules restricting how much could be put into cash-based Isas – and switches not being allowed from investments into cash – have been swept away. The result is that you can take far greater control over the composition of your Isa.
Although all the focus is on pensions, I think you should ignore Isas at your peril. They're easy to set up, add to and eventually get rid of (no lifetime allowances to worry about or minimum age to get to as with pensions).
Isas are the future. Let's all embrace them.
Jeff Prestridge is the personal finance editor of the Mail on Sunday. Email him at email@example.com
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
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.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.