Back to basics: New Individual Savings Accounts (NISAs)

Savings are set to undergo some dramatic changes this summer, following the Chancellor George Osborne’s decision to revamp the way tax-free individual savings accounts (ISAs) work.

In his March budget, Osborne announced that from July 2014, ISAs will be replaced by New ISAs (NISAs). These will be much more flexible than their predecessors, and there will be an increase in the range of investments which can be held in them.

Our back to basics guide tells you all you need to know about how NISAs will work, so that you can keep as much of your hard-earned cash away from the taxman as possible.

Why are ISAs changing?

Current ISA rules are pretty restrictive. For example, this tax year (2014/15) you can save a total of £11,880 in ISAs, but only half of this, £5,940, can be held in cash. Savers can invest the same amount in stocks and shares, or put the whole allowance into stocks and shares.

However, plenty of savers don’t want to put money into stocks and shares, as there is a risk you may not get back as much as you put in, which means half their allowance each year goes unused.

So what’s happening in July?

With effect from July 1, cash and stocks and shares ISAs will be merged to create a single New ISA (NISA), in which savers will be able to invest a total of £15,000. That means they can invest this full amount in cash if they want to.

The other major change is that savers will be able to transfer their money from a stocks and shares ISA into a cash ISA for the first time. Currently, you can only move money from cash into stocks and shares.  This change will benefit those whose approach to risk changes over time. For example, if you are approaching retirement and don’t want to put your savings at risk, you will now be able to move into cash.

What happens before the new rules kick in this summer?

Between now and June 30, ISA rules remain as they were before. This means the maximum you can hold in cash between these dates is £5,940. However, when July 1 arrives, you should then be able to top up your account to the £15,000 limit. If you are considering a fixed rate cash ISA, however, check with your provider as to whether you are able to top up your account in July – some providers only offer a short window during which you can pay in the full allowance.

Can I still split my allowance if I want to?

Yes, you can. You will be able to invest part of your allowance in stocks and shares and part of it in cash, but the difference is there will no longer be a limit on the amount you can hold in cash, so you can split the allowance anyway you like. For example, from July you will be able to invest £14,000 in cash if you want to, and £1,000 in stocks and shares, or the other way round.

Is anything else changing in July?

Yes, if you are investing in stocks and shares, then some of the rules surrounding which investments you can hold in your ISA are being relaxed. For example, at the moment, you can only hold corporate bonds in an ISA if they have at least five years to run. From July 1, there will be no such restriction, so investors can hold short-dated securities in their ISA too.

There’s also good news for anyone who puts cash into a stocks and shares NISA, perhaps because they haven’t yet decided which funds to invest in. At the moment, interest paid on cash held in a stocks and shares ISA is subject to tax at 20%, but this charge will be removed from July, and you won’t have to transfer your money into stocks and shares at all if you don’t want to.

Didn’t the Chancellor say peer-to-peer lending could be held in ISAs too?

Yes, although he hasn’t yet announced when exactly this will happen, so it’s unlikely that you’ll be able to hold this sort of investment in an ISA from July. The Government is currently consulting on how exactly this will work.

Peer-to-peer lending involves individuals lending directly to other individuals or businesses, cutting out the need for bank and building societies. The aim is that lenders earn better returns than they would from savings accounts, while borrowers benefit from lower loan rates.

While it is FCA-regulated, peer-to-peer lending is not currently protected by the Financial Services Compensations Scheme (FSCS) although most lenders have provision funds in place to protect lenders in the event that borrowers default on their loans.

Are there any changes to Junior ISAs?

Yes, between now and July, the maximum you can invest in a Junior ISA or Child Trust Fund account is £3,720, but this will go up to £4,000 from July.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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