The new version of Individual savings Accounts (ISAs) came out today and are now, imaginatively, called New ISAs or NISAs.
What is a NISA?
ISAs have always been a tax-efficient way of investing money either regularly or as a lump sum. In the last tax year to 5th April 2014, you were allowed to invest up to £11,520 into an ISA, but only £5,760 (half of this) could be held as Cash and the combined amounts you could pay into your Cash and Stocks and Shares ISAs had to be less than £11,520.
Under the new rules, you're now able to save up to £15,000 per tax year per person (an increased allowance of £3,480) and the NISA will also offer you the option to save your whole NISA allowance of £15,000 in Cash, Stocks and Shares, or any combination of the two.
You are able to open one cash NISA and one stocks and shares NISA each tax-year with new money. But you can also open other NISAs to transfer old ISAs into. The Treasury is planning to launch a consultation shortly on how investors might gain access to the peer-to-peer lending market through NISAs, but this is unlikely to be available for a while yet.
What are Cash NISAs?
Cash NISAs are a way of saving up to a limited amount each tax year in a bank or building society account without having to pay any tax on the interest. You have the usual range of accounts available from ones offering instant access to ones offering fixed rates provided you lock your money away for a set time frame like 3 years.
What are Stocks & Shares NISAs?
Stocks and Shares (sometimes called Equity) NISAs is a way of investing money into ‘Funds’ which grow tax efficiently. You don’t have to pay tax on money you make in the fund, so if your £10,000 investment is worth £30,000 when you come to sell it, you won't have to pay any tax on the gains. And, apart from dividend income (paid with 10% tax already deducted which can’t be reclaimed), the rest of the income is tax-free. Money invested in Stocks and Shares carries risk so you would usually be advised to consider it committed for at least 5 years, although in practice the money isn't tied in for any set time frame.
Stocks and Shares NISAs are a popular alternative to pensions, especially to basic-rate taxpayers. Although you don’t get tax relief on your NISA contributions (as you would with a pension), they can provide a tax-free income. ISAs give you the freedom to gradually drawdown the investment tax-free any time you choose (not just after the age of 55 like pensions) and use the money any way you like. You may wish to pay off a mortgage, help towards the cost of education for the children or supplement your income when you stop work.
What are Funds?
A ‘Fund’ is a term used to describe an investment into a collective package of shares and/or Bonds. This allows you to combine your money with other investors, which spreads your investment risk across a range of different companies. Funds are usually managed by a Fund Manager who decides which companies to invest in and when to buy and sell the holdings. Unit trusts and Open Ended Investment Companies (OEICs) are both examples of ‘Funds’.