2014 Budget Update – Investment Focus
Chancellor of the Exchequer George Osborne’s shake-up of the individual savings account (ISA) regime may have been largely unexpected but it received a broadly warm welcome nevertheless. The changes had three main strands – a significant extension to the annual allowance, a simplification of the overall structure and the introduction of new allowable asset classes within ISAs.
Prior to the 2014 Budget, there had been rumours the Chancellor would seek to impose a lifetime cap on ISAs, as has been done with pensions. As it was, he went in the opposite direction, hiking the annual allowance to £15,000 from its current level of £11,520. The limits for Junior ISAs were also increased – from £3,720 to £4,000.
Arguably the Chancellor’s most important change, however, was to make the structure of ISAs simpler. He has created a ‘New ISA’, which gets rid of the separate allowances for cash ISAs and stocks and shares ISAs, and allows transfers from stocks and shares ISAs to cash ISAs. Transfers had previously only been allowed in the other direction.
The creation of this single allowance means conservative, cash-based savers may shelter more within an ISA even if this may not currently be an attractive option for many. However, the move also allows more flexibility for all types of ISA investors, enabling them to change their asset allocation more easily over time.
As an example, more cautious investors whose ISA holdings are substantially in stocks and shares could now move to cash should rates improve or they feel the market looks set to weaken. Equally, the greater simplicity is also welcome. Investment is complex for novice investors and anything that makes it easier to understand is likely to improve savings rates.
The Chancellor’s final move was to broaden the range of allowable investments within an ISA to include peer-to-peer lending schemes, which aim to match individual lenders with borrowers who may be unable to find financing elsewhere. The extension to the rules comes hot on the heels of the recent decision to allow Aim investments to be included within ISAs.
There is now a broad range of potential ISA investments, including standard open-ended funds and investment trusts, exchange-traded funds, individual shares, Aim stocks and commercial property funds. The ISA now has real clout as a savings option, enabling investors – should they so wish – to build a highly sophisticated portfolio that remains sheltered from tax.
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