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New style of Isas to benefit small savers and investors

Small savers and larger investors will get a welcome tax-free bonus from next month with the introduction of Nisas - new style, more flexible Isas with higher investment limits.

ETHICAL: Gillian Lawrence likes that she can easily see where her bank invests. Picture: Steve Cox
ETHICAL: Gillian Lawrence likes that she can easily see where her bank invests. Picture: Steve Cox

Although tax-free Individual Savings Accounts have been available since 1999, when they replaced Tessas (Tax-Exempt Special Savings Accounts) and Peps (Personal Equity Plans), millions of people still aren't taking advantage of the benefits offered to every taxpayer, no matter what size their savings pot.

NFU Mutual says a quarter of UK adults - around 12.5 million people - are wasting money because they use ordinary taxable accounts instead.

Sean McCann, its personal finance specialist, said: "If you have savings and investments but no Isa, you could be losing out. By not making full use of an Isa allowance, savers and investors could be giving money to the taxman unnecessarily."

New Isas - or Nisas, as all Isa accounts will be known from July 1 - can contain cash deposits, stocks and shares, or a mixture of the two. Under current rules they have to be kept in separate accounts.

Unlike ordinary savings and current accounts, where - depending on the holder's tax bracket - at least 20 per cent of the interest goes to HM Revenue & Customs, there is no tax to pay on cash Isa interest, regardless of income level.

Dividends earned on stocks and shares held within an Isa wrapper are also tax free, and there is no capital gains liability on investment growth.

As a result, in 2012-13 (the latest tax year for which figures are available), the UK's 23 million Isa holders saved around £1.9 billion, which would otherwise have gone to HMRC.

Until the end of this month, the most each adult can put into Isas annually is £11,880. The whole amount can be invested in a stocks and shares account, or split between stocks and shares and cash, with a maximum cash deposit of £5,940.

From July 1, the annual maximum subscription will rise to £15,000, with no limits on how it can be split between the two types of account. This means anyone looking for a low-risk return can put the whole lot into cash savings.

Junior cash Isas are also available for under 18s, who can pay into an adult version too once they reach 16.

The 2014-15 Junior limit rises from £3,840 to £4,000 on July 1 and can also be split in any proportion between cash and stocks and shares.

You can continue paying into an Isa indefinitely, up to the annual subscription limit, or open a new one of each type - or, from July 1, a new mixed one - every year.

Money in old Isa accounts can be left to accumulate without additional deposits, withdrawn, or transferred into the year's new account.

Transfers can be made without eating into the current year's limit, but check first that your chosen provider accepts them, and be sure to follow the procedures it lays down exactly to avoid losing the tax benefits.

Isas are available from banks, building societies and a wide range of investment providers.

Leeds Building Society has a five-year fixed-rate cash Isa paying 2.85 per cent. To get this much interest from an ordinary taxable account, a basic rate payer would need to make 3.6 per cent, while a higher rate payer would require 4.75 per cent.

For those seeking a shorter investment term, Nationwide has a three-year fix at 2.25 per cent. Islamic Bank of Britain is paying 1.8 per cent on a 120-day notice version, while NS&I and GE Capital Direct have instant access accounts offering 1.5 per cent.

The stocks and shares option is riskier but potentially more rewarding for those who can afford it.

Maike Currie, of Fidelity Personal Investing, said: "While it is important to hold some cash as a 'rainy day' fund and some disposable cash to take advantage of new investment opportunities, the beauty of a stocks and shares Isa is that it allows you to invest in a wide range of investment vehicles such as bonds, equities and funds."

She added: "Over a long time horizon, the ups and downs of the stock market can be smoothed out. The figures show that investing in equities would have earned you thousands more, compared to saving through cash over the past ten years. For most savers, that will be too big a discrepancy to ignore."

Fidelity has calculated that £15,000 invested in the FTSE All-Share index over a 10-year period would now be worth £35,218, while £15,000 put into the average UK savings account over the same time would only have grown to £16,582. That is a difference of £18,636.

NFU Mutual's Mr McCann said: "If you think you may be one of those who is missing out, it may be worth speaking to a professional financial adviser to make sure you're making the most of your money."

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