How does 2014 Budget make ISAs NISA?

You will probably have gathered that the Budget 2014 announced improvements to ISAs. This is good news for investors who have been making use of their annual ISA allowance each tax year. As a reminder, if you haven’t yet used your 2013/14 allowance, you have until 5th April to place £11,520 into tax free savings… you had better hurry.

ISAs got NISAcocoon

So what has changed? Well from July the new ISA (NISA) allowance rises to £15,000 and the restrictions for cash and investment ISAs ends. Today you can convert a Cash ISA into an investment ISA, but not the other way around. This will help clients who are low risk in nature, but also anyone else seeking to hold cash for the short-term, perhaps when planning a significant withdrawal.

Over £443 billion in ISAs

If you followed my recent blog about the ISA millionaire, one has got to now wonder how long ISAs will have before they are attacked. There are now an estimated 3.8million people with at least £30,000 in ISA with around £443bn held in all forms of ISAs by around 15m people (almost 1 in 4).

Tax free income

Let’s take a theoretical example. Ivor is 65 and has around £400,000 in his ISA portfolio. He expects to live to 85 and has a State pension and employers pension providing him with an income of £20,000 a year. He would like to spend £45,000 a year and so draw £25,000 from his ISA each year. So his income is £45,000 a year. I won’t get into the detail of the tax calculations, but this would normally trigger higher rate tax; however only about £10,000 is taxable at 20% due to his personal allowance and ISAs providing tax free income. He pays £2,000 tax on £45,000 an effective rate of tax of 4.4%. Now call me a pessimist, but I cannot imagine that many UK Governments are really keen for pensioners with incomes of £45,000 to pay less the same in tax as someone earning £20,000.

Will you outlive your money?

Just for your information, if the £400,000 ISA grows at 6% a year and he takes income of £25,000 a year and increases this by 3% each year (to keep pace with inflation) he will run out of money in the 23rd year… at which point, he would be 88 (8 years above the average male life expectancy).

Dominic Thomas: Solomons IFA