The New ISA (NISA) has arrived, meaning you can now put up to £15,000 in a tax free account each year. The previous limit was £11,880 so you can now invest an extra £3,120 in tax free savings.
From July 1 2014 all ISAs will become New ISAs (NISAs). This applies to all existing ISAs and new accounts opened after 1 July.
The NISA will be more generous and will offer flexibility to save your NISA annual allowance of £15,000 in cash, stocks and shares or any combination of the two.
Under the NISA rules you are able to transfer savings freely between stocks and shares and cash. This is a useful new facility as previously money invested in a stocks & shares ISA could not be converted back to cash.
A stocks and shares ISA can offer better long term returns than a cash ISA. However, stocks and shares are more risky because they can go down in value as well as up. The ability to switch between the two freely means that people can now invest in stocks and shares without being locked into the market indefinitely.
If you're planning to take advantage of the new allowance and need a new home for your NISA savings you could consider the following options:
Cash NISA
Cash NISAs.are the lowest risk way to invest in a tax free environment. The capital you invest is secure (subject to the limits of the Financial Services Compensation Scheme).
You receive interest on your investment but unfortunately in the current low interest rate environment these rates are not overly attractive.
Never the less a cash NISA will continue to be a suitable home for money where a saver is risk averse or where they may need instant access to their money.
Structured Deposit NISA
A Structured Deposit is a type of cash NISA so the capital you invest is secure (subject to the limits of the Financial Services Compensation Scheme).
The investment would typically be for a fixed period of 5 or 6 years.
Like with a cash NISA you receive interest on your investment, but the amount of interest is not fixed at the outset and is instead dependent on the performance of the stock market and would typically be payable at the end of the 5 or 6 year term.
So if the stock market was worth less when the plan matured than it was at the outset then you would just get your capital back without any interest.
But if the stock market had risen you would get your capital back plus interest equal to the rise in the stock market.
Structured Deposit NISAs are therefore a popular way for savers to get potentially higher returns similar to those that can be provided by the stock market but without risking their starting capital.
Stocks and shares NISA
A stocks and shares NISA is suited to people investing over the medium to long term, typically for 5 years or more.
Investment can be made into individual stocks or more commonly into investment funds which are large pooled investments holding many savers’ money together in one place.
The funds in turn invest in a portfolio of underlying shares and assets which are managed by life assurance companies and investment boutiques with the aim being to generate a medium to long term capital gain for the investor.
The approach affords individual investors the economies of scale needed to get a very diversified portfolio coupled with dedicated day to day management of the assets by life assurance companies and investment boutiques.
A stocks and shares NISA could deliver a significantly better long term return than a cash NISA or a Structured Deposit NISA. But this is not guaranteed and the value of any investment in stocks and shares can go down as well as up.
As a tax free way to save the NISA has a place for almost everyone.
If you require any assistance please contact Bob Marris or Andrew Clayton of RNS Independent Financial Advisers who will be happy to advise you and help with your query.