Every time George Osborne takes hold of a red box he seems to come up with another tax-free savings vehicle.
Or so it appears to Individual Savings Account (ISA) savers, who two years ago had two straightforward choices: cash or stocks and shares. Cash for the risk averse, stocks and shares for the risk aware.
Now, depending on your home ownership status and attitude to risk, there are two more options in the mix – the Help to Buy ISA and the Innovative Finance ISA, and one on the way – the Lifetime ISA.
Which to choose? How much to save in each? Navigating the new savings maze requires more motivation than a bush tucker trial – only the most tenacious will pass.
The rest of us are more likely to opt for the ‘get me out of here’ option, and scarper to the nearest high street instant access account which, as it happens, is no longer the shamefully unsavvy option it once was.
As if five ISA options were not enough, the Chancellor has simultaneously rendered ISAs almost redundant to the majority of savers by introducing a personal allowance on all savings of £1,000 of annual interest from April this year. It means the first £1,000 of interest on any savings account is tax-free anyway for basic rate taxpayers (£500 for higher rate taxpayers), regardless of whether that account is an ISA.
To generate more than £1,000 of interest on a cash ISA earning a measly but average 1.5 per cent and therefore be liable to pay tax on it, you’d need to have saved more than £75,000.
If you were just going to invest in a cash ISA anyway, this effectively means there is no reason to do so over a regular savings account, unless you’ve already amassed a substantial pot (the annual limit for cash and stocks and shares is £15,240 for the tax year 2016/17).
With the Help to Buy and Lifetime ISAs (the latter will be introduced in April 2017), there are other advantages besides not paying tax that make these options a lot more appealing than regular cash savings. If you’re a first-time buyer or a young person wanting to prioritise early pension saving, you’d be madder than a celebrity in the jungle to choose a regular savings account over one of these, because they come with free cash top-ups from the Government, too.
Here’s a bit more on the new kids on the block.
Innovative Finance ISAs are invested in peer-to-peer loans on platforms such as Abundance, Crowdstacker and Crowd2fund. Many of the biggest peer-to-peer platforms such as Ratesetter and Funding Circle have not yet been authorised to offer them but are taking ‘registrations of interest’. The returns may be higher than with cash ISAs at between 5 and 7 per cent, in which case there may still be financial benefits to choosing these over a regular savings account with a personal tax-free allowance (although they also come with greater risk.)
Help to Buy ISA
Tax-free cash savings up to £12,000 in a Help to Buy ISA will get 25 per cent extra from the Government on top (so £15,000) in total. You can save up to £1,200 in the first month then £200 a month after that. You only get the bonus at the point you buy your first home.
For under 40s only, these are the revved up version of the Help to Buy ISA and will be introduced in April next year, allowing savers to invest up to £4,000 a year and get a 25 per cent government top-up at the end of the tax year. These savings can be used to buy a first home or for retirement, and are even for those who are already homeowners, with access to the pot when you reach 60. The annual bonuses will be paid until age 50. Unlike the Help to Buy ISA, you can invest the LISA in cash or stocks and shares.
What’s next, you might wonder? The PISA (Pension ISA)? The UFISA (University Fees ISA)? The potential is endless. If you want to own your own home or have a decent income in retirement, information on the new stack of ISAs is better knowledge to store in your brain than, say, the winner of the last I’m a Celebrity.
Rebecca O’Connor is the founder of Good With Money and a former financial writer at The Times