Introduced in April 1999 by Gordon Brown, ISAs replaced the earlier Peps and Tessas to provide a tax-efficient way of saving each year. First came the mini and maxi, then the cash model and stocks and shares version. In July 2014, the restrictions between cash and stocks and shares Isas were relaxed with the introduction of the New ISA (Nisa). We all thought it was finally made simple and thankfully the term Nisa never caught on.
But this was short lived when George Osborne released a plethora of new ISA products. Now you can use an ISA to buy your first home or save for retirement. But not if you are a certain age, need the money earlier, already own a home, or are caught by any of the numerous other restrictions.
Most people understand the concept of cash and stocks & shares ISAs. Most of the queries we receive are regarding the Help to Buy ISA and Lifetime ISA.
Help to Buy ISA
On the face of it, Help to Buy ISAs are a bit of a no-brainer if you are a first-time buyer. An individual is able to save on a regular basis and then apply for an additional 25 per cent bonus from the government. It is possible to save up to £1,200 in the first month and then up to £200 per month after that. You are able to save up to £12,000 each to get the maximum available bonus of £3,000.
Assuming you contribute the maximum each month, in order to receive the maximum bonus available you will need to save for four years and seven months. Over that period, the average property price went up by nearly 30 per cent to £217,000 (Office for National Statistics). Some of that increase was due to a recovery following the 2009 crash, but even if house prices only went up by another 5 per cent, that is still an increase of £10,850. A bonus of £3,000 is not going to help much.
Like the Help to Buy ISAs, Lifetime ISAs should be of benefit to first-time buyers. They are able to save up to £4,000 per year with a government bonus of 25 per cent that has a maximum level of £32,000. The maximum property value has also increased to £450,000, compared with £250,000 (£450,000 in London) for the Help to Buy ISA.
In order to receive the maximum bonus of £32,000, the individual will need to save for 32 years. This means opening the account at age 18 and saving the maximum £4,000 per year until age 50 when the bonus stops. There are not many people who will be able to do this.
Lifetime Isas can be used as a retirement savings vehicle. This could have been great news for clients reaching their lifetime allowance or who are affected by the tapered annual allowance. But of course, you can only open this account between the ages of 18 and 40. Most people in this age bracket are considering further education, starting a career, moving up the property ladder or starting a family. Retirement is simply not on the agenda.
Let us say someone starts saving in a Lifetime ISA because they are attracted to the idea of what seems like free money in the shape of the government bonus. After five years of diligent saving, they find themselves made redundant. They have a mortgage to pay, council tax, utility bills, food bills and they find their deposit account is not going as far as they hoped it would. To make ends meet, they would need to access their Lifetime ISA. But because they are under the age of 60 and not using the money to buy their first house, they would lose the government bonus and have to pay a 5 per cent penalty. While there has been talk of expanding the life events that allow people to access the money without penalty, nothing has emerged yet.
In terms of rules, the one area of Isas that has stayed relatively stable is the Junior Isa, which became available in November 2011. This provides a great planning opportunity for parents to start a nest egg for their children without the tax implications for themselves. At age 16, the child can open their own cash Isa as well, significantly increasing the amount that can be saved for the final two years.
What’s the answer?
My ideal solution would be an ‘I day’. This would entail one product or wrapper that can be used for tax-efficient savings in either cash or investments and can be drawn on for any life event. Oh wait, we already have that.
ISAs are an attractive planning tool allowing clients to save money each year in a tax-efficient way. With the increase of the adult ISA allowance to £20,000 from April 2017, this is a meaningful amount of money. So why do we need more products on the market, other than to complicate matters even further?
Senior Technical Consultant
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This article appeared in FT Adviser on 18 January 2017.