ISAs Autumn Statement boost
As well as a higher investment limit and greater flexibility as to how ISA money can be allocated and transferred, the appeal of ISAs has been further boosted by the
announcement in the 2014 Autumn Statement that spouses or civil partners will be able to inherit their partner’s ISA benefits after death. It is estimated that around 150,000 people each year lose out on the tax advantages of their partner’s ISA when their partner dies, even if they were saving as a couple. Under the new rules, ISA holders who die from 3 December 2014 are able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance which they can use from 6 April 2015.
“Thankfully, HMRC has listened to reason and a spouse’s investments can be passed down in specie rather than the deceased’s ISA having to be encashed,” explains Magi Andrews. “Overall, the decision for flexibility must be welcomed and lends support to yet greater investment within the ISA wrapper. Whether or not the emergence of substantial ISA portfolios with a value of £500,000 plus will bring about politically inspired demands to restrict tax relief remains to be seen.”
Into the unknown
While the changes to the ISA framework should have a positive impact on ISA sales, new developments in two other areas of the financial landscape could, however, have an adverse impact on the product’s popularity: Pensioner Bonds and the new pension freedoms.
Launched in January for the over 65s, the availability of Pensioner Bonds has recently been extended by the Government to 15 May, with the total issue now expected to be
£15 billion, up from the original allocation of £10 billion. Although it is a time-limited offer, over a million pensioners are expected to benefit from these bonds, with the rates on offer - 2.8% for a one-year Pensioner Bond and 4% for a three-year Pensioner Bond - beating the equivalent market-leading cash ISAs, even though the interest is taxable.
ISA money is potentially susceptible to being lost to Pensioner Bonds as HMRC figures show that the greatest number of ISA savers are to be found among the 65 years and over age group, the same section of society who would be eligible for Pensioner Bonds. “There is likely to be an impact, particularly for cash ISA products, but Pensioner Bonds will appeal mainly to those investors with a lower risk profile than clients who subscribe to a stocks and shares ISA,” suggests Magi Andrews.
However, this is not to say that some of the money that would otherwise have been directed to stocks and shares ISAs will not find its way into Pensioner Bonds instead. The most recent figures from the Investment Association suggest that this may already be happening, with retail fund sales in January 2015 totalling just £320 million, compared with £1.7 billion in December 2014. Furthermore, ISAs experienced a net retail outflow of £159 million in January 2015, their highest outflow since October 2008.
“Two words spring to mind when considering the sudden slump in fund sales - Pensioner Bonds,” argues Laith Khalaf, Senior Analyst at Hargreaves Lansdown. “There is no smoking gun, but it’s a fair guess that the market- beating NS&I bonds have attracted some of the cash that might otherwise have been invested. There might also have been some
INDUSTRY PERSPECTIVE An ideal opportunity to engage with clients
Among the many radical changes to the way we save announced at the last Budget, the increase in the ISA allowance to £15,000 was one of the changes more easily understood by investors and was welcomed by the nation’s savers - arguably some of the biggest losers from the economic downturn, as UK interest rates have remained firmly at the bottom of the barrel.
Stephen Wynne-Jones, Head of Marketing at Cofunds, reflects on whether clients and advisers are taking advantage of the new NISA regime
But in the first six months of existence, has that initial positive response actually translated into action?
Well, it would appear so. Research we carried out into NISA flows in the first six months of its existence showed that one in 10 ISA investors through Cofunds have taken full advantage of the new ISA limit since its introduction, while one in five have so far made partial use of it.
That’s over 62,000 investors using the new £15,000 allowance.
In addition, there have been over 10,000 brand new investors to the platform putting in the full NISA allowance. Collectively, we’ve seen a 91% increase in the amount of money invested when compared with the same period in 2012 and 2013 combined.
While it remains to be seen whether the initial flurry of activity is repeated during the next few months of ‘ISA Season’, the research certainly indicates there’s plenty of potential, with over 70% of investors yet to take advantage of the new £15,000 allowance ahead of the financial year end.
The nation’s savers have finally been listened to - and what better reason to engage with clients?
jitters caused by the Greek debt crisis, and the forthcoming UK election moving into view, which led investors to shun investment markets in January.”
ISAs versus pensions
Another unknown that could impact ISAs is the new pension freedoms set for April 2015, which threaten to change the dynamics of the ISA versus pensions relationship (see Tony Mudd’s Industry View column on page 18). A major attraction of ISAs has always been the ease by which money held in them can be accessed. However, with individuals in defined contribution pension schemes set to be able to access their pension funds more flexibly from the age of 55 (albeit subject to tax), could this encourage more money to flow into pensions such as SIPPs at the expense of ISAs?
“The introduction of Pensioner Bonds and the changes to the pension rules have certainly given clients more options when thinking about where their excess income or capital will be placed,” comments Frazer Wilson, Senior Consultant at Thomas Miller Wealth Management. “However, our inclination is that ISAs will remain as popular as ever, especially bearing in mind that the tax effectiveness can now be transferred between spouses on death and the allowance has risen to £15,000 per person for the 2014/15 tax year.”
High expectations
Despite the potential challenge to ISAs posed by these two new developments, research conducted by CoreData suggests that ISA sales should comfortably scale new heights in the current tax year. It predicts that ISA inflows could increase by as much as 67% in the 2014/15 tax year as a result of the recent changes to ISAs.
16
Investment Life & Pensions Moneyfacts
® March 2015
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