From July 1 the Individual Savings Account (ISA) will become known as New Individual Savings Account (NISA).
A LARGER SAVING ALLOWANCE
As well as a name change, you’ll also be able to put more of your savings into an account where the taxman can’t get his hands on your interest. At the moment the overall annual limit is £11,880, with the most you can save tax free in cash savings restricted to £5,940 per tax year.
However, from next Tuesday the limit increases to £15,000 and it will be possible to invest your full allowance in a cash product if you want to.
Alternatively, you can split the allowance however you like between a cash NISA or a stocks and shares NISA, although you will still only be able to open one of each type in any one tax year.
The problem at the moment is that many savers aren’t aware that they will be able to save more money without paying tax on their interest.
This was evidenced in a recent Nationwide Building Society survey where almost half of people didn’t know that the tax-free savings limit was being increased.
THE GOLDEN RULE
Just because the rules are changing there is no need to panic. However, if you are planning to switch your NISA to a new provider, make sure you follow the correct procedure.
Don’t go to the bank or building society which has your current ISA and ask them to close the account so you can deposit elsewhere otherwise you will lose the tax-free benefits of that money for good.
ALWAYS instruct your new NISA provider to manage the switch on your behalf – they will arrange for the monies to be transferred across and that way you don’t lose the tax-free status on your savings.
Switching from stocks and shares to cash is now allowed. Previously you were allowed to transfer existing cash ISA balances from previous tax years into a stocks and shares fund but not the other way round.
But from July 1 that restriction is lifted – and that’s good news as it gives you more choice in how you manage your savings nest egg. Investment expert Justin Modray of Candid Money feels that the new rules are a positive move for savers. He says: “The new rules allowing shares ISAs to be transferred into cash gives savers and investors greater long-term flexibility.”
The potential returns you can receive from investing in a stocks and shares NISA are much higher than with a cash NISA, as illustrated in the table above.
However, it’s important to remember that there is also additional risk. Stock markets can be volatile and impact the value of your investment.
This is much less of an issue for younger investors as over time there’s a good chance that the market will recover and they will get their money back.
However, if you’re nearing retirement, you don’t want to risk taking a big hit on your savings at a time when your potential to earn money by working is coming to an end.
Experts will generally tell you that you should take less risk with your money in your final years of work.
Modray agrees, adding: “It is not uncommon to take more risk when you are younger by investing in stock markets and then look to move towards cash as you get older and want to start spending your savings.”
Guy Simmonds from Nationwide Building Society hit the nail on the head when he said: “Certainty of income and protecting capital is hugely important, not least for older savers for whom it provides a vital part of their retirement income.”