How the government is getting it right on our long-term savings

Published by Jeff Prestridge on 05 May 2017.
Last updated on 05 May 2017

It is time to push to one side the government’s recent litany of mistakes and, for once, give Theresa May’s wobbling administration a little bit of praise.

So I will not linger on its crazy decision to raise taxes for the self-employed (now sensibly rescinded), the spiteful attack on the bereaved with the punitive increase in probate fees (although this has now been placed on hold due to the election) and inexplicable school funding cuts.

Instead, I want to say ‘well done’ for its commitment to long-term savings with the big boost it has given tax-friendly individual savings accounts (Isas) – savings vehicles that allow people to build wealth they can access tax-free and at any time.

The changes, which came into force at the start of the new tax year on 6 April, mean adults can save or invest a maximum £20,000 a (tax) year in an Isa. This is a big jump above the annual limit of £15,240 for tax year 2015/16.

 

For children, the maximum annual contribution into Junior Isas increased more modestly from £4,080 to £4,128. But mix the changes all together and a family of four – with two children under the age of 16 – can squirrel away up to £48,256 into Isas from 6 April this year through to 5 April next year.

That’s a mighty big collective allowance which most hard-pressed families will be unable to take advantage of in full. But it’s welcome nonetheless, giving individuals greater scope to build their own mini tax havens.

On top of this, 6 April saw the launch of the Lifetime Isa, a plan primarily designed to help the under 40s save enough to put down on a deposit for a first home.

 

Although the annual savings limit is restricted to £4,000, the government is chipping in with a 25% bonus which turns it into £5,000. This is extremely generous and timely given the difficulty most wannabe first-time buyers face in putting together a home deposit.

I have been a long-standing fan of Isas and have been investing in a stocks and shares-based plan on a monthly basis. I also have a cash Isa, which pays me a pittance in interest but is there in case of financial emergencies.

 

What I love about the Isa regime is its flexibility – the fact that you can make tax-free withdrawals if you need to, as I have done when I’ve had tax bills to pay. You can also increase contributions or put in a lump sum if you come into some unexpected money such as a bonus at work (I’ve yet to receive one, but I remain in hope).

Isa savers do not enjoy the tax relief on contributions that they get with a pension. But with all the restrictions being applied to pensions (for example, how much can be saved before extra taxes are applied), Isas are a key part of the tax-friendly savings jigsaw.

Indeed, judging by an infographic that the Treasury published on ‘ways to save in 2017’, the Isa seems to be the government’s preferred way to incentivise people to save for retirement.

Both Isas (in all their various forms) and Premium Bonds (question to Treasury: why?) got a mention but, bizarrely, pensions were omitted. Maybe it signals that at some stage the government will end higher-rate tax relief on pension contributions, something it has been threatening since 2015.

With the £2 billion black hole in the government’s finances created by the Chancellor of the Exchequer’s U-turn on National Insurance Contribution increases for the self-employed, such an overhaul is looking increasingly likely.

So if you have money left over after paying the insurance bills (set to rise in June with an increase in insurance premium tax), the mortgage, and ever-rising utility bills, do give Isas a thought.

If you can, invest rather than save within the tax-free wrapper. With returns on cash so pitiful and most taxpayers having a right (via the personal savings allowance) to earn at least £500 of savings interest tax-free outside an Isa, a strategy built on regular Isa investing makes best sense.

Good luck. Seize the Isa moment.

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