What is a good way to 
use my ISA allowance?

There are some new ISA products to help you make the most of your hard earned income.

Are you desperately trying to save for your first home or, are you at the other end of the spectrum, saving so that you don’t have to work to an age when your faculties have started to go downhill fast?
Many doctors are doing exactly that, yet current interest rates and pension legislation are making the reality of achieving either harder than disentangling a box of string guarded by a fun-loving kitten!
Are the upcoming ISA changes going to come to your rescue?

1. Your much higher ISA allowance

The first bit of good news is that the 2017/18 ISA allowance is now £20,000 – that’s over 30% higher than the previous £15,240 ISA allowance! It’s the biggest hike in years and timely.
It means that, this tax year (2017/18), you can either save £4,760 more into an ISA or move other investments into this tax efficient environment.

2. The new Lifetime ISA launches

On the 6th April 2017, the much talked about Lifetime ISA (LISA) was launched. Whilst it is specifically aimed at helping young people simultaneously save for both their first home and their retirement (instead of having to choose one over the other), the LISA also offers tax savings that will benefit the not-so-young.

  • You must be between 18-40 to be eligible to open a LISA;
  • You can save up to a maximum of £4,000 each tax year;
  • The Government will add a 25% bonus to your annual LISA savings, up to age 50;
  • You can continue to contribute to a LISA beyond age 50 but these contributions will not be eligible for the 25% bonus;
  • You can contribute to one LISA in each tax year, as well as a cash ISA, a stocks and shares ISA, and an Innovative Finance ISA; your higher £20,000 2017/18
  • ISA allowance encompasses all your ISA savings.

Let’s do the maths…if you start your Lifetime ISA at age 18 and save the maximum £4,000 each year into it until you’re age 50, you will have saved up to £128,000 tax free and received a total government bonus of £32,000. Thank you very much Mr HMRC!
The reality…
There is, of course, a slight catch to the Government’s generosity. The Lifetime ISA bonus can only be withdrawn tax free without penalty:

  • When you buy a house if you are a first-time buyer, or
  • At any point after the age of 60.

As retirement savings, your LISA money could potentially:
Be a good supplement to your pension, or
If you are in the 2015 NHS Pension Scheme, be used to bridge the gap between 60 and your state retirement age when you can access your pension without penalty.
There is an availability catch too. Many providers feel that the Government didn’t offer the clarity they needed around the regulations in time for LISAs to be made readily available in April. It has meant that, at the time of writing (May 2017), only one provider believes they will be able to offer a LISA this April.

Lifetime ISA vs Help to Buy ISA

If you’re currently saving into a Help to Buy ISA, should you start saving into a Lifetime ISA instead? Simply put, unless you’re buying a house before April 2018, the answer is yes.
If you transfer your Help to Buy ISA into a Lifetime ISA – which you can do until the 5th April 2018 – you will qualify for the Government’s LISA bonus on the amount you transfer.
If you keep your Help to Buy ISA and open a Lifetime ISA, you will only be able to use the bonus from either your Help to Buy ISA or your Lifetime ISA, not both. It therefore makes sense to transfer your Help to Buy ISA savings into a Lifetime ISA.

3. Lifetime ISA bonus to be paid monthly

If you open a Lifetime ISA account in April 2017, your 25% bonus will be paid annually at the end of the 2017/18 tax year. After that, from April 2018, your bonus will be paid monthly. Result!
It means that your LISA savings will benefit even more from compound interest. If you don’t know what compound interest is, I suggest you look it up – Einstein quoted it as “the 8th wonder of the world”.
You do need to note though that the 25% bonus is only paid on your contributions; it is not paid on the interest your savings earn (for cash LISAs) or any investment growth (for stocks and shares LISAs).

4. The new Innovative Finance ISA

If you want to avoid the volatility of the equity markets but want a potentially higher return than your cash ISA or bank/building society savings, an alternative is coming in the form of the Innovative Finance ISA (IFISA)*.
The IFISA is being introduced by the Government in response to the growing trend amongst individual investors to invest in crowdfunding-type investments such as peer-to-peer lending.
With an Innovative Finance ISA, you benefit from the providers’ expertise in the peer-to-peer lending marketplace – leaving them to assess the loans and deal with all the legal aspects – whilst getting a share in the returns.
Needless to say, such an ISA is not without risk, the rate of return is not guaranteed and, as with all investments, your capital is not guaranteed.
Still, it may be something worth discussing with your financial adviser, especially if stocks and shares aren’t for you or if they feature too heavily in your portfolio. There’s nothing wrong with a bit of diversification…as long as you’re comfortable with the associated risks involved.

5. Knowing the unknown

The Government has also mooted, but not yet confirmed, the possibility of allowing borrowing from a Lifetime ISA without suffering a charge if it is repaid within set timescales. Ways of improving the Lifetime ISA criteria are also under review, such as allowing contributions and bonus eligibility after age 50, and increasing the contribution limits.
Lifetime ISAs are a good, highly tax efficient option for those doctors who have seen other investment avenues fall by the wayside. Providers have been slow to launch products but we expect to see products launched this year.
One thing is for sure, with an over 30% increase in your annual tax free savings allowance, plus some potentially suitable new and interesting investment options becoming available, there’s never been a better time to review your ISA contribution levels and investments.

 

Nigel Farrar

Nigel Farrar

Independent Financial Adviser at Legal & Medical
Our articles are designed to be informative but do not constitute financial advice. We recommend seeking specialist advice before making a decision.

Legal & Medical Investments Ltd is registered in England & Wales No. 3429678 Registered Office; Splatford Barton, Kennford, Exeter EX6 7XY Tel: 01392 832696.

We are authorised and regulated by the Financial Conduct Authority. Entered on the Financial Services Register under reference 185193.

The Financial Conduct Authority does not regulate offshore investments, tax advice, estate planning and some forms of mortgages. The tax reliefs referred to on our articles are those currently applying in the United Kingdom to UK Tax Residents. These tax reliefs are liable to change. The value of any tax relief available will depend upon the individual circumstances of the taxpayer.
Nigel Farrar

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