Rule changes to Individual Savings Accounts set to come into force next month are the perfect opportunity for the over-50s to ensure they are using the tax breaks to maximise the returns available, says Heron House Financial Management.
“Tax-efficient Isas should form the bedrock of the majority of people’s money savings strategies,” said Heron House financial planner Saran Allott-Davey. “This is important to remember at a time when many people we see say they have been steered away from Isas by bank sales staff towards more complex structured products.
“Recently they seem to be pushing plans that pay eye-catching rates on savings provided the same amount is placed in an investment product which charges higher fees. This is great for the bank’s profits but probably not as good for consumers as simply having a sensible Isa strategy in place that works well over the long-term.”
From October 6th the Isa allowance for the over 50s (and those who will reach age 50 during the 09/10 tax year) is set to increase from £7,200 to £10,200 – of which up to £5,100 can be cash. These higher limits will apply to all Isa savers from April 2010.
Saran Allott-Davey said there were some important principles that can help money savers maximise their Isa returns, in particular to focus first on interest income ahead of dividend income.
“Isas are most tax-efficient for cash and fixed-interest investments such as bonds and gilts,” she said. “Basic rate taxpayers can avoid paying 20 per cent tax on interest and higher rate taxpayers avoid paying 40 per cent tax.
“Cash Isas should be top priority to new savers and we recommend most people focus on one rather than setting up new ones each year with different providers – it simplifies administration, gives access to more generous rates and makes it far more likely people will review and transfer to secure a higher income.”
She said Isas are less tax efficient for dividend income from share investments which already have a notional 10 per cent tax taken which cannot be reclaimed.
“Basic rate taxpayers have no further income tax to pay whether the shares are held inside or an outside an Isa so the main benefit is to shelter the profits of asset sales from Capital Gains Tax which is in any case only payable on gains above £10,100
“Shares Isas makes more sense for higher rate taxpayers who can avoid a further 22.5 per cent on dividend income. In this case the general rule is to place higher yielding shares and equity funds in the Isa ahead of those paying low or no dividends unless the holder expects to enjoy significant capital gains.”
Saran Allott-Davey said that in her experience most new clients coming to Heron House need to rethink their Isa strategies to deliver greater tax benefits. She said: “It is easy to do and even small gains can compound up to large sums over long periods of time.”
Capital gains exemption is the only significant reason. Apart from that, you do not have the bother of declaring dividends on tax returns.