So the 1st of July has been and gone with the most exciting event being Andy Murray’s failure to retain his Wimbledon crown, but something else happened on this day that might have gone unnoticed. As a result of the most radical budget for years, it was announced that from this date you could save up to £15,000 into an ISA. The new ISAs would be called NISAs – a catchy name – how long will it last? What is a NISA and what is different about it other than the increased allowance? Without wishing to sound too anti-climatic, not that much!
1 – You can now transfer your existing stocks and shares ISA to a cash NISA and visa versa (it was previously only possible to go from cash to stocks and shares).
2 – You can open up two NISAs in a year – one for cash and one for investment and split the £15,000 allowance between the two however you wish (previously restricted under cash ISA).
3 – You can put up to £15,000 into a cash NISA (previously restricted to £5,940).
They are all positive changes and should help individuals meet their financial goals, after all a NISA is a great tax wrapper that enables your money to grow in a tax sheltered environment. And now back to the headline…… lots has been written in the press about how the NISA could spell an end for pension saving and indeed there are some changes that could be seen as a challenge to pensions – principally the increase in the allowance and the flexibility to move all or part of the NISA from investment to cash. You can now shelter a reasonable sum in a NISA each year (a couple can shelter £30,000 between them), effectively the internal taxation of the growth is the same as a pension, and now when you get close to needing the money you can move it to cash to reduce the risk you are taking. These things coupled with what has always been the advantage of ISAs – the ability to take as much out as you want to without further liability to tax makes them seem very competitive.
But let us revisit the pension for a couple of moments – at the same budget that introduced the NISA, Mr Osbourne announced something far more radical – the freedom to not have to buy an annuity and more importantly the effective removal of any constraints on taking money out of your pension (applies to money purchase pension schemes and after age 55). If you take money out of a pension you can generally have 25% of it tax free but the rest will be taxed at your marginal rate. The most important thing about a pension though is that you get tax relief at your highest rate of tax when you put money in. Unlike with a NISA where any contribution will be net of tax. I thought I would compare the products using 60p and making many assumptions – it assumes no growth, no personal allowance, no National Insurance and 40% tax payer in, 20% tax payer out (which I believe reflects most clients). It is important to remember this is not an exact calculation and it is not intended as advice.
60p Personal Contribution
40p Government Contribution
£1 invested in pension
60p Personal Contribution
No Government Contribution
25p Tax free cash
75p taxable at 20% = 60p*
Total Out 85p
60p out no tax to pay
*Assumes tax paid at Basic Rate Tax 20%
So, in this particular example the pension would appear to be a better product as you would end up with more money back. Now as I said this makes lots of assumptions and is not a detailed analysis (as you can see) however, I believe it does reflect a large amount of clients. In reality the right answer is a combination of both products to meet given life needs as they arise – a NISA may be great for school fees planning and a pension is a great retirement vehicle. A good financial plan will blend them and other tax efficient products together to meet your life goals. The NISAs are not a knockout punch for pensions but used in combination with pensions, offshore bonds and other tax efficient products they will provide a great jab, cross, uppercut in your financial armoury.