ISAs have become even more attractive in 2017/18, with a substantial increase in the annual allowance to £20,000, a new Lifetime ISA for the under 40s, and the Junior ISA limit increasing to £4,128.
The increase in the annual ISA allowance to £20,000 means a couple will be able to put up to £40,000 into ISAs in 2017/18.
This substantial hike in the annual contribution limit – from £15,240 per person in 2016/17 - will help propel more investors towards becoming tax-free millionaires.
Calculations by Brewin Dolphin show that an individual who invested the maximum in a stockmarket ISA in 2016/17 and continues to do so in subsequent years could become an ISA millionaire by the year 2039*.
The increase is also welcome given recent reductions in pension tax allowances, where annual contributions are now generally limited to £40,000 and as little as £10,000 for the highest earners.
With interest rates at record lows, for many investors it could make sense to consider stockmarket rather than cash ISAs.
We can advise you on the most appropriate investment choices for your ISA, taking into account how long you are happy to invest for, how much risk you are prepared to take, and your overall personal circumstances.
Welcome to LISA
The other major ISA change this year is the launch of the Lifetime ISA – “LISA”.
This is aimed at helping younger adults to save for retirement or build up funds towards the purchase of a first home.
It is only available to people between the ages of 18 and 40 and the maximum that can be invested is £4,000 a year.
The big attraction of the LISA is it offers a 25% government bonus on contributions, so that for every £4 saved the government adds £1. This means a maximum bonus of £1,000 on the annual £4,000 limit.
Although you can withdraw money from a LISA whenever you want, to keep the bonus you will need to put the cash towards buying a first home worth up to £450,000 - or have reached age 60.
Young adults can have a LISA and a Help to Buy ISA – which also offers a 25% government bonus – and parents and grandparents can provide the money to invest.
Lifetime ISAs could be useful for lots of young adults. But people should get advice before choosing between a LISA and a pension - which may give employer contributions and higher-rate tax relief.
Lastly, the Junior ISA (JISA) subscription limit has been increased to £4,128 for 2017/18.
For families wanting to save into a child’s JISA on a monthly basis, the new annual limit is equivalent to 12 monthly contributions of £344.
Many families invest in cash JISAs, but a stockmarket JISA offers the potential for higher returns.
Calculations by Brewin Dolphin show that investing a child’s full JISA allowance in the stockmarket each year from birth could give them a £150,000** start in life at age 18. This could be enough to cover the cost of university and help towards a first home deposit.
Saving the same amounts in a cash JISA until age 18 might produce £40,000 less overall***.
Your financial planner can advise on appropriate JISA investments.
If you would like to discuss any of the issues raised in this article, please call 020 3201 3900 or contact your local Brewin Dolphin office.
*Projected stockmarket ISA value £1,012,307. Assumes annual ISA limit increases 2% a year after 2017/18 and investment returns of 5% a year after charges.
**Assumes annual JISA allowance increases 2% a year and investment returns of 5% a year after charges.
***Assumes 2% interest a year.
The projected ISA amounts do not take into account inflation, which has the effect of reducing the real value of the investment.
The value of investments can fall and you may get back less than you invested.
Past performance is not a guide to future performance.
Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.
This information is for illustrative purposes only and is not intended as investment advice.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset.
We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.