Why you still need to use your ISA allowance
BY READERS DIGEST
1st Jan 2015 Managing your Money
Tax-free individual savings accounts (ISAs) have been hugely popular since launch in 1999, but lately their popularity has slipped. There are still sound reasons why you should still use your annual ISA allowance, as it could save you thousands in tax over your lifetime.
Dwindling faith in ISAs
Plunging rates on cash ISAs have dented the savers’ enthusiasm while the new personal savings allowance allows them earn up to £1,000 tax-free interest outside an ISA from 6 April.
Market turbulence has also scared people away from investing in a stocks and shares ISA, as they fear another crash. But it's not all hopeless, there are huge tax benefits.
It is far less taxing
If you save money in an ISA, all your interest, dividends and growth will be free of income tax and capital growth for the rest of your life. You can even now pass on the tax-fee benefits to your spouse or civil partner when you die, which benefits 150,000 married savers every year.
The money will ultimately fall into your estate and may then be liable for inheritance tax.
The ISA allowance is generous
Every UK adult can save up to £15,240 in the current tax year, which means couples can save twice that amount. The allowance is issued on a "use it or lose it" basis, so you have to act before midnight on 5 April or lose this year's ISA benefits for good.
The good news is you get a fresh allowance from 6 April, also worth £15,240.
It builds up over time
If you had invested the maximum amount since ISAs were launched in 1999 you would have sheltered £163,320 from the taxman by now, with all your income and capital growth on top.
Some who invested maximum amounts into stocks and shares have become ISA millionaires.
The personal savings allowance is limited
The personal savings allowance allows basic rate taxpayers to earn £1,000 a year in interest before paying income tax, while higher 40 per cent taxpayers can earn £500. This means a basic rate taxpayer can have £66,666 earning 1.5 per cent before paying any tax, higher rate taxpayers can have £33,333.
However, savings rates will not always be this low: if they rose to five per cent a basic rate taxpayer would pay income tax on savings above £20,000, falling to just £10,000 for a higher rate taxpayer.
Retirement planning benefits
ISAs are a great way to save for a long-term goal such as retirement and that way you can ignore short-term stock market swings. Your money grows free of all tax and you can withdraw lump sums or regular income free of tax to top up your pension after you retire.
You are protected from tinkering
Regardless of who is Chancellor, politicians cannot resist tinkering with our taxes and pensions. ISAs have largely been immune whereas some pension tax benefits have been repeatedly cut in recent years.
