ISA rules refreshed

By | Savings

Launched as the follow-up to the Personal Equity Plan (PEP), the Individual Savings Account (ISA) has just reached its 25 year anniversary. Prior to the start of this tax year, ISA regulations have remained largely unchanged for some time. The updated ISA rules taking effect from 6th April 2024 will, however, lead to greater choice for savers and investors, further reinforcing the benefits of using your ISA allowance.

ISAs provide a tax-free wrapper in which any income earned is exempt from Income Tax, and in the case of Stocks and Shares, any gains are free from Capital Gains Tax. There are five types of ISA, with Cash ISAs and Stocks and Shares ISAs being the most well known. The Lifetime ISA and Innovative Finance ISA are less popular, and the fifth ISA, the Junior ISA, is only open to those under the age of 18. The maximum an individual can save in an ISA in any tax year is £20,000, and the subscription can be split across the different ISA types. The Junior ISA has a £9,000 subscription limit.

There is no facility to carry forward unused ISA allowances, and therefore it is important to make regular use of the allowances as they become available each tax year.

Split your ISA across providers

Until 5th April 2024, the ISA rules restricted an individual to opening just one ISA of each type in a tax year. These restrictions have now been lifted, and you can now invest in multiple ISAs of the same type, in a single tax year. For example, you could split your ISA subscription between a fixed rate Cash ISA with one bank or building society, and a variable rate Cash ISA with another institution. Similarly, you could split a subscription into a Stocks and Shares ISA across different ISA providers. The new freedom does not, however, extend to Junior ISAs or Lifetime ISAs, where the single provider per tax year limit remains.

Less restrictive transfer rules

The ISA rules on transfers have been relaxed to give investors more freedom and choice. Before 5th April, partial transfers of ISA money paid in the current tax year were not permitted – you had to transfer the whole ISA balance. You can now make a partial transfer of money that is subscribed in the same tax year. For example, you could invest £20,000 into a variable rate Cash ISA, and later in the tax year, partially transfer £10,000 of that subscription into a Fixed Rate Cash ISA.

Loophole for 16 and 17 year olds closed

The new legislation has closed the loophole that has previously allowed those aged 16 and 17 to save £29,000 tax free each year. Under the old rules, the minimum age for a Cash ISA was 16, which allowed someone aged 16 or 17 to subscribe £20,000 into a Cash ISA and £9,000 in a Junior ISA, which is open to those under the age of 18. The rules have been tightened, with only those aged 18 or over now being able to open a Cash ISA.

British ISA

Many clients have asked us for further information on the British ISA, which was announced in the Budget statement last month. The statement confirmed that the British ISA would provide individuals with an additional ISA allowance of £5,000, on top of the existing ISA allowance, which could be used to invest in UK companies. The eligibility rules for the British ISA are yet to be announced, and the Government are currently engaging in a consultation period with the industry, which is set to run until 6th June. Whilst it remains a possibility that the British ISA will become available later in the current tax year, it is far more likely that the allowance will not become available until April 2025.

NS&I Bonds

Another of the announcements in the March Budget was the latest round of National Savings & Investments (NS&I) savings bonds. The new issues have been labelled as “British Savings Bonds”, but in essence they are simply a new moniker for the Guaranteed Growth and Income Bonds. These are long established savings products, where all income earned is taxable.

The new issues do not offer anywhere near the market leading rate of interest offered on the last round of Bonds, which were only available for a short period last Autumn. The new British Bond issues are both fixed for a 3 year term, and the interest rate payable (4.15% per annum on the Growth Bond and 4.07% per annum on the Income Bond) is uncompetitive when compared with similar fixed rate bonds offered by Banks and Building Societies. The only real positive factor to consider is that the products are backed by the Treasury and therefore offer greater protection than the standard £85,000 Financial Services Compensation Scheme (FSCS) protection limit.

Time to review existing savings

With the new tax year upon us, we feel this would be an ideal time to reassess your existing savings arrangements. Cash interest rates have been higher over the last 12 months than they have been for some time, although we expect that UK base interest rates will begin to fall later this year. As a result, it may be a good time to consider the level of savings you hold and whether surplus savings could be more productively invested in other assets, such as Equities or Corporate  Bonds. Speak to one of our independent advisers to carry out an assessment of your existing cash savings, and to make sure you are making best use of your ISA allowance.

The quest for real income

By | Investments, Savings

Base interest rates have increased sharply over the last 18 months, as Central Banks aim to tackle high levels of inflation. As a result, interest rates on cash deposits have increased and those who look to produce an income from savings and investments can now generate relatively healthy levels of interest from deposit accounts.

On the face of it, cash is a risk-free investment, as the initial cash balance deposited does not fluctuate in value; however, the hidden risk in holding cash is the eroding impact of inflation. Let’s look at a typical savings account that is paying 4% annual interest before tax, which was opened one year ago. At face value, holding a deposit in this account will have earned 4% return and you will still hold your capital value. The hidden risk is that the real value of the cash deposited – i.e. adjusted for inflation – will have fallen. At the time of writing, the rate of UK inflation over the last 12 months has been 6.7%, which means that the amount deposited will be worth 2.7% less in real terms than when the account was opened. There are other risks of cash too, as the highest paying accounts restrict access to your money, and attention needs to be paid to the limits afforded by the Financial Services Compensation Scheme.

As we move into 2024, we expect interest rates to fall as inflationary pressure eases further, and the eye-catching rates on offer now may be a distant memory in twelve months’ time. This leaves investors who are holding cash needing to find another home as a way of generating income. This is where Equity Income investments have a real advantage over time, and as part of a diversified portfolio, can look to generate an attractive and rising income yield.

Look to dividend income

Part of the return from holding Equities are the regular distributions of excess profits, in the form of dividends. Most mature companies declare dividends to shareholders at regular intervals, and a company that enjoys a strong performance may well look to increase its’ dividend payments over time, which could potentially offset the effects of inflation.

There are a number of global stocks that have a track record of increasing dividends year on year, with the likes of Coca- Cola, IBM and Johnson and Johnson being prime examples of US listed global companies who have consistently raised their dividends each year for the last 25 consecutive years. The UK also has a smaller list of companies who have consistently raised their dividends, such as British American Tobacco and Diageo.

Dividend income is only one part of the potential return that can be achieved from holding Equities, as holding company shares can also offer scope for capital gains over time. Whilst Equities will introduce short-term volatility – which is not a feature of cash accounts – the long-term track record of returns generated by Equities markets highlights the capacity for Equities to significantly outperform returns achieved from cash deposits.

Spreading the risk

Dividends are, however, not guaranteed, and by holding individual Equities you introduce stock-specific risk. Changes in the fortunes of the company in which shares are held can not only impact the share price, but also the potential for dividend growth. Indeed, a company that begins to struggle may look to cut its’ dividends, or cancel it altogether.

As a way of mitigating this risk, we would suggest that holding Equity Income funds is a more appropriate way of gaining access to companies that pay an attractive dividend stream. This can help avoid the potential for issues with one particular company or sector having too great an impact on the overall fund value. Whilst there are a limited number of passive investments that specifically target stocks with increasing dividends, the majority of Equity Income funds are actively managed. This is where a manager or management team will look to select positions and build the portfolio, with a view to holding companies that offer an attractive and increasing dividend yield, and good prospects for capital growth over the longer term.

Equity Income funds cover most geographic areas of the World, providing access to dividend producing companies from the UK, US, Europe and Far East. There is also a wide range of Global Equity Income funds, where the fund manager can select the most appropriate positions from anywhere in the World.

As the performance of an actively-managed Equity Income fund relies on the skill of the manager, it is important to select the right fund – or blend of funds – to seek out the best performance. The level of income, and overall return, achieved from within the Global Equity Income sector can vary significantly from the best to worst performance over time, and this is where careful analysis of the fund, portfolio strategy and management style are crucial. The FAS Investment Committee regularly meets with leading fund managers from all sectors, including those who manage Equity Income funds. These regular meetings strengthen our quantitative approach to fund selection, so that we can truly understand the methods and rationale behind the portfolio selection process.

Equities as part of a diversified portfolio

It is important to point out that Equity Income funds are one of a range of different options for those seeking an income from their savings or investments. Cash deposits absolutely have a place in most sensible financial plans; however, the amount held in cash needs to be considered carefully, as the hidden eroding impact of inflation over time can easily eat into the real value of deposits.

Speak to one of our experienced advisers to discuss the options to generate an income.

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Making the most of ISAs

By | Savings

Individual Savings Accounts, universally known as ISAs, were introduced in 1999. Given their tax-free status, they have become a popular choice for savers and investors over the years. From relatively simple beginnings, there is now a wider range of ISA options available and we explore ways that individuals can make best use of their annual ISA allowance, and make existing ISAs work harder.


Why use an ISA?

The primary reason for the ISAs popularity is the preferred tax treatment, which is enjoyed by all ISAs. Interest received on bond and cash investments held within an ISA is tax free and does not count towards your personal savings allowance.  For Stocks and Shares investments, all capital gains and dividends are free of UK tax and dividends received within an ISA are ignored when considering your available dividend allowance.


Two becomes five

Originally, there were only two types of ISA available. The Cash ISA, which is a simple deposit account offering either instant access or an interest rate for a fixed period of time, and a Stocks and Shares ISA, which allows investment in any share listed on a recognised stock exchange, together with Collective Investments, such as Unit Trusts.

Over the years, the list of available types of ISA has expanded, and with these changes, ISAs have become more complex. Junior ISAs were introduced in 2011, and are available to those aged under the age of 18. These ISAs can either hold Cash or Investments and automatically convert to adult ISAs when the child reaches the age of 18.

ISAs that aim to give individuals a helping hand onto the property ladder were introduced in 2015, via the Help to Buy ISA. This is now closed to new investors, being replaced with the Lifetime ISA. This ISA is open to individuals aged between 18 and 39, and allows investors to save towards a deposit on their first home, or to use the accumulated savings towards their retirement.


Stick to the limit

Whilst ISAs once had simple to understand investment limits for each Tax Year, with the varying types of ISA now available, careful consideration of the annual limits is now needed.

Irrespective of which ISA or ISAs are selected, the total contribution limit for adults across all ISAs in the 2021/22 Tax Year is £20,000. The Lifetime ISA annual limit is £4,000, although this forms part of the overall £20,000 limit that adults enjoy. The Junior ISA has an annual limit of £9,000, although by a quirk in the rules, children aged 16 or 17 can also subscribe £20,000 into a Cash ISA, in addition to the Junior ISA allowance.


Transferring an ISA

One feature of traditional ISAs, which is not widely understood, is the ability to transfer an ISA from one provider to another, and also to transfer a Cash ISA to a Stocks and Shares ISA and vice versa. ISA transfers, which are carried out in a prescribed manner, retain the tax privileged status of the ISA, and do not interfere with the ability to make the full subscription in the current Tax Year. There are a number of caveats that need to be followed, including the need to comply with the overarching rule that an individual can only have one Cash ISA manager and one Stocks and Shares ISA manager in use at the same time, with money paid in from the current Tax Year.


Transfer rules and the inflation headache

The simplest form of ISA transfer is the ability to move Cash from one Bank or Building Society account to another deposit taker. Using the prescribed ISA transfer method, these transfers are straightforward and should take no more than 15 business days. The new account manager applies to the existing account to transfer the balance which arrives into the newly opened ISA.

Cash ISA transfers between banks and building societies can be useful to move funds to another bank offering a better rate of deposit interest. However, given the very poor rates of interest offered on savings accounts generally, and the increase in the rate of inflation over recent months, transferring between Cash ISA providers is likely to simply mean moving from one account offering negative real interest rates (i.e. after taking inflation into account) to another.

We are seeing an increase of clients in this position, and one potential solution is to consider transferring a Cash ISA to a Stocks and Shares ISA. This opens up a range of investment options within the ISA, from Equities (Shares), Corporate Bonds, Gilts and other Fixed Interest investments, to Commercial Property and Commodities, which aim to provide investors with superior returns to Cash in this period when interest rates remain low and inflation is rising quickly.

To demonstrate historic returns from assets other than cash, the chart below shows the return you would have received from Cash Savings (represented by the Bank of England Base Rate plus 1% per annum, with interest reinvested) compared to the total return achieved FTSE100 index of leading UK shares, over the last 10 years. Whilst obviously showing greater volatility, historic returns from Equities over the longer term have comfortably exceeded those achieved from holding funds on Cash deposit.

Important. Source : FE Analytics, January 2022. The graph shows the compound growth of the Base Rate plus 1% per annum with income reinvested, compared to the total return (growth in index value plus dividend income) from the FTSE100 index since January 2012. This graph is presented for illustrative purposes. Past performance of any investment is not necessarily a guide to future returns. The value of investments can go down as well as up and you may not receive a return of your original capital.


Let FAS guide you

Any investment other than Cash will introduce an element of investment risk, and it is important to consider whether this is appropriate to your circumstances. This is where our experienced planners at FAS can help, by discussing the options with you and overseeing the ISA transfer process so that the valuable tax benefits are retained on transfer.

For more information on ISAs click here for our helpful guide, or contact one of our planners here to discuss your requirements.


The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Inflation sign in front of financial report

Should savers be worried that the inflation ‘tiger’ can’t be tamed?

By | Savings

Although inflation has been a relatively benign threat in recent years, it’s become an increasing concern in 2021. But how worried should savers be, and what can they do to make sure inflation doesn’t seriously erode the value of their assets?


Fears of higher inflation have been dominating investment markets throughout this year. Back in February, the Bank of England’s chief economist Andy Haldane caused a stir when he compared inflation to a “sleeping tiger” that may prove “more difficult to tame” than he, or his fellow central bankers around the world, would like.


What is inflation?

In a nutshell, inflation is the rate at which the price of goods and services increases over time. It is the reason why a single can of Coca-Cola cost 45p in 2007, but today will set you back 90p. Inflation is one of the key measures of financial prosperity because it determines what consumers can afford to spend their money on.

Inflation is usually expressed as a percentage increase (or decrease) in prices over time. The Bank of England has set itself a target of keeping UK inflation at around the 2% level. So, for example, if the cost of a litre of petrol increases by 2% a year, then motorists will need to spend 2% more at the pump than they did last year.


Why is inflation particularly bad for savers?

Inflation can be good news for holders of assets, particularly homeowners and the owners of some shares, especially if the value of their assets rises faster than the general level of inflation. However, inflation is usually bad news for anyone with a fixed income or those that rely on savings interest.

People with large cash amounts, as well as bond holders, could suffer most. Cash loses value very quickly when inflation starts to pick up, and investors start selling bonds – which pay a fixed rate of return – because inflation eats into the real value of that income. Higher inflation also increases the prospect of the Bank of England raising interest rates to push inflation back down.

Of course, the main reason why those on fixed incomes worry about inflation is that it erodes the purchasing power of money. If inflation is rising, it means the money in your pocket doesn’t go as far. For savers, if the money in their savings account isn’t rising at least in line with inflation, then the value of what they can purchase with that money is declining over time, and they run the risk of seeing their standard of living fall.


Why is inflation a concern now?

Over the past 12 months or so, inflation in the UK has been fairly subdued. That’s because the demand for goods and services has been low, thanks to the pandemic. However, while inflation has remained below the Bank of England’s 2% target since 2019, the Bank itself expects an inflation surge this year, as the economy recovers from its COVID-19 slump, and more demand pushes up the prices of goods and services.

And fears over rising inflation are not just confined to the UK. Across the globe, over the last year, enormous economic stimulus packages have been implemented by governments to help prop up their economies as countries experienced widespread lockdowns. If higher inflation is on its way, then it looks likely to be a worldwide problem.


Should you be on your guard for inflation?

Opinion is divided on whether inflation is going to become a serious problem for savers and retirees in the next few months. But it’s not a bad idea to plan for higher inflation and make changes to your finances just in case.

For example, now would be a good time to think about whether you have any savings held in savings accounts earning a tiny rate of interest, and whether you would be better off investing that money in ways that allow it to earn a higher return.

Retirees often hold more of their pension and other investments in cash or fixed-income assets. If this applies to you, it might be worth considering purchasing more equity investments that historically tend to perform well when inflation is rising. Finally, we can also undertake a review of your retirement plan to make sure it remains on track, as well as taking higher inflation into account when determining how much income you will need to give you the retirement that you want.


Riding out the inflation storm

With the threat of higher inflation looming, those reliant on savings income or fixed incomes should consider taking a long-term view while making some slight short-term adjustments. The important thing to remember is that there are several things you can do to limit the potential impact of inflation on your savings or your pension fund. With a few structural changes, we can help you to position your finances to benefit from inflation, instead of falling victim to it.


If you are interested in discussing your investment portfolio, cash savings, or pension with one of the experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Piggy bank looking at timer running out

Time to switch your Cash ISA into a Stocks and Shares ISA?

By | Savings

The rate of interest paid by Cash ISAs has been dismal for the last decade. If you’re disappointed with the return you get on your Cash ISA, perhaps it’s time to transfer into a Stocks and Shares ISA instead?


The humble ISA (Individual Savings Account) was launched back in 1999, as a way for anyone over the age of 18 to save, without paying tax on interest earned or income and capital gains from the growth of the investment. The ISA concept has proven so popular that new versions have been introduced, including Junior ISAs, Innovative Finance ISAs, and Lifetime ISAs. As a reminder, you can save or invest up to £20,000 in a Cash ISA or Stocks & Shares ISA every tax year (the current 2020/21 tax year closes on 5 April and the 2021/2022 tax year begins on 6 April).

It’s easy to understand why Cash ISAs are so popular with UK savers. For starters, they are easy to set up. And there’s no lock-in period, meaning you can access your cash almost instantly when you need to. Another important feature is that Cash ISAs worth up to £85,000 are protected by the Financial Services Compensation Scheme.


No signs of savers losing interest in ISAs

There’s no sign that this popularity is waning, either. According to 2018-2019 government statistics, the number of people subscribing to Cash ISAs increased by 1.4 million from the previous tax year, while the number of Stocks and Shares ISA subscriptions fell by 450,000. In fact, more than three-quarters (76%) of open ISAs are Cash ISAs.

Clearly, most people prefer to hold cash than take bigger risks with their money. While investing in stocks and shares offers the potential for higher returns, people are often put off by the risk that they could lose all their money, and stock market volatility over the past two decades has underlined this concern. Back in 2000, the split between people opening new Cash ISAs and new Stocks and Shares ISAs was roughly 50/50, but since then, the number of people opening Stocks and Shares ISAs has fallen substantially.


The hidden cost of saving into Cash ISAs

People don’t like losing money, which means they are prepared to accept lower returns in exchange for the reassurance that their money is ‘safer’ left in cash. But the painful truth is that for the last decade, the majority of people who hold Cash ISAs have been losing money year-in, year out.

Last year, research from ‘Which?’ revealed that out of the 10 biggest ISA providers, six were paying just 0.01% AER (annual equivalent rate) on their instant access ISAs. The list included Bank of Scotland, Halifax, Nationwide, NatWest, RBS, and Santander. This means a large proportion of UK savers are earning just 10p for every £1,000 saved over the course of a year. With Cash ISA savers earning such a low rate of interest on their money, they’re not even benefitting from their ISA’s tax-free status. The Personal Savings Allowance introduced back in 2016 allows basic rate taxpayers to earn £1,000 of interest from ordinary savings accounts each year without paying tax. For higher rate taxpayers, the interest limit is £500.


Another hit to the pockets of Cash ISA savers

Even those Cash ISAs paying a higher rate of interest are still losing money for their owners. Inflation measures the rise in the cost of living. Or, in other words, it tells you whether the pound in your pocket (or Cash ISA) is worth more or less than it was previously. In the UK, the Consumer Prices Index recorded the 12-month inflation rate at 0.6% in November 2020.

If you’re saving money, you want the future value of that money to grow. But if the savings in your Cash ISA are not keeping up with the rising cost of living, and are growing by less than the rate of inflation (0.6%), the value of your cash savings is effectively shrinking. We think it’s time that Cash ISA holders asked themselves whether it’s time to say “enough’s enough”, and put away their fears of investing in the stock market.


Take another look at Stocks and Shares ISAs

Whether you decide to call “time” on your Cash ISA really depends on what you plan to do with your ISA pot, and when you need it. If you expect to withdraw your ISA savings within six months or a year, then investing might not be the best option. Stocks and shares are best considered as long-term investments that you are prepared to hold onto for years. This way, your money stands a better chance of overcoming any short-term periods when markets are not doing so well. Shares tend to yield more impressive inflation-beating returns over the long-term.


Helping you to make investment decisions

Investing in stocks and shares doesn’t have to be intimidating. At FAS, we have a dedicated specialist investment team that can make sure your Stocks and Shares ISA matches your own personal attitude towards risk, and that your money is invested with your personal needs and objectives in mind. This means helping you to use your annual ISA allowance most effectively, as well as building a Stocks and Shares ISA managed in a way that you feel most comfortable with. Our team will also regularly review your portfolio to make sure your investments remain on track.


How to transfer your existing ISAs

Under current ISA rules, you can transfer your savings into the same or a different type of ISA without losing any of the tax benefits you have already accrued, and arranging a transfer doesn’t affect your annual tax-free ISA allowance of £20,000. So, it’s no problem to transfer your savings from your Cash ISAs into a stocks and shares version.

But don’t just withdraw the money in your Cash ISA, because if you do, you’ll lose the tax benefits. Instead, you need to contact your current ISA provider (or providers) to request an ISA transfer, or we can arrange to do that for you, as well as finding the Stocks and Shares ISA provider that best suits your investment needs. ISA transfers should take no more than 30 working days.

Cash ISAs used to be a great way to save for the future, but money only grows if you put it to work. Nothing ventured nothing gained, as they say. The good news is that you don’t have to settle for earning next to nothing on your savings – there are plenty of ISA options available that offer the potential for higher returns, while still keeping all of the tax benefits already gained.


If you are interested in discussing your ISA or investment strategy with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

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Shifts In The Savings Landscape

By | Investments, Savings | No Comments

Government incentives to save – like ISAs – are valuable, but recent changes to the savings landscape have opened up new opportunities while closing down some old ones.

If you are aiming to buy your first home, investing in a Lifetime ISA (or LISA) could be a great help. The recent withdrawal of the Help to Buy ISA in December 2019 means that the LISA is now the only tax-incentivised savings plan for first-time buyers. Anyone who had already taken advantage of the Help to Buy ISA during the four years it was available can continue to contribute to it until November 2029.

You must be between the ages of 18 and 40 (inclusive) to open a LISA, and qualifying savers can invest up to £4,000 per tax year. Like other cash ISAs, it grows free of tax, but they also benefit from a 25% government bonus. This is added to the contributions – so for every £4,000 invested, the government adds another £1,000. Once you turn 50, however, you will not be able to pay into the LISA or earn the 25% bonus. This bonus is a major advantage of LISAs compared with the Help to Buy ISAs, where the bonus was capped at £3,000.

Beware of penalties

The trade-off, however, is a withdrawal charge if you cash-in or withdraw from your LISA before age 60 and you are not using the funds to buy your first home (there is an exception for those who are terminally ill).

Ordinarily, the charge is 25% of the amount withdrawn, which recovers the government bonus and applies an extra charge to the original savings. This can be a trap for savers, who could actually end up with less than they paid in, if their circumstances change and they need early access.

However, as of 5th May 2020, there has been a recent relaxing of the withdrawal rules by the Treasury to allow for the current situation – LISA holders who withdraw money will face no penalty until April 2021 as the previous 25% of the amount withdrawn has been cut to 20% until April 2021, which is the equivalent of the bonus being taken back.


Child Trust Funds mature

For even younger savers, the first Child Trust Fund (CTF) accounts reach maturity in September 2020. Launched in 2005, the government contributed for children born between 1 September 2002 and 3 January 2011, when the scheme was closed.

New regulations will ensure that the freedom from UK income tax and capital gains tax will continue once the CTF has matured at age 18, even if no action is taken by the now-adult account holder.

Both the maturity of CTFs and the complex LISA rules serve as reminders that financial advice is important wherever you are on your savings journey.

Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. The Financial Conduct Authority does not regulate tax advice. Tax laws can change.