Growing your wealth with ISAs: why individual savings accounts can be great for your finances
It seems odd that in a general climate where there is so much controversy over foreign corporations paying no tax in the UK, pop stars using dubious tax avoidance schemes, and where there is a raging debate about whether “we are all in this together”, there sits in the middle of our tax system, the most wonderful and simple tax haven of all: the ISA.
ISAs have morphed over time out of a combination of PEPs and TESSAs into their latest incarnation, the New ISA, or NISA. If you stretch back far enough in time, it is possible today that a married couple who maximised their allowances each and every year since the advent of the PEP, and who obtained a reasonable growth return on their money, could now have over £2 million in ISAs! This is £2 million in an effective onshore tax haven.
A tax haven is – in this respect – an area to hold money where there is no tax to pay. In fact, there is nothing even to declare!
It could be argued there is some form of contradiction here – the UK currently has an annual deficit running of about £100 billion, a national debt of around £1.5 trillion, but offers its citizens the chance to put significant sums into an account which completely and simply takes it out of the reach of tax.
The ISA really is a wonderful savings vehicle, first and foremost because money can be put in and can grow free of personal taxes (although be aware that ISAs will be assessed for IHT on death).
However, over and above this the ISA is inherently flexible, offering no tie in (money can be taken out however, whenever) and can be invested into assets ranging from the virtually no risk, such as cash, to the very high risk, such as the most volatile of shares.
They can be used as part of retirement planning, to save towards a deposit on a house, to help with the repayment plan against a mortgage on a house or just as a general savings vehicle for rainy day purposes. They are tax efficient, flexible and multi-functional. They are easy to open, manage and administer. They “tick many boxes”!
Over and above all this, even at a time of difficult government finances, the government have recently increased the amount that can be put in, increasing the annual subscription amount to £15,000.
This is an individual amount – a couple can now put £30,000 into ISAs each and every year. Furthermore, Junior ISAs allow children to accumulate money from a very early age in the same way; albeit with lower limits.
The impact of paying no tax on any investment within an ISA is huge; £15,000 that grows tax free at 6% per year (ignoring charges) is going to be worth £48,107 in 20 years’ time. If tax was applied to the growth (assuming a tax rate of 20%) this return would be £38,310. The tax freedom adds nearly £10,000 more.
ISAs represent a fantastic, straightforward and highly efficient savings vehicle without any contentious element whatsoever and should, more often than not, be at the very heart of any individual’s or couples’ financial planning.