Isas:Make the most of the £10,200 limit

[Admin]

Isas:Make the most of the £10,200 limit

Savers aged 50 and over will see their Isa allowance rise from £7,200 to £10,200 next month, giving them each the chance to shelter 40pc more from tax.
 
Published: 11:15AM BST 24 Sep 2009



There are 21 million people aged over 50 in Britain and it is likely that a large number will take this opportunity. Even those who will not be 50 until next April are allowed to take advantage of the new Isa rules from October 6. Of all the savers who use their Isa allowances in full every year, three quarters are over 50.

New research from the fund manager Fidelity shows how investing in autumn, rather than the end of the tax year in the spring, could increase returns by £7,580 or more over the long term. Over the past 15 years, someone using up the full personal equity plan (Pep) and Isa allowance on October 1 each year would now have a total fund of £148,008 if they had invested in line with the FTSE All Share Index, or £292,114 in the Fidelity Special Situations Fund.

 
Related Articles
Which equity fund should you choose?
The pick of the bond funds
Egg won't accept top-ups to best buy cash Isa
Isas: the magnificent seven
Isas: just 5pc of over-50s know how much more they can invest
The best one-year cash Isas Making the same investments on April 1 each year instead would have resulted in funds worth £140,427 in the case of the FTSE All Share Index – a difference of £7,581 – and £267,638 in the case of Fidelity’s Special Situations Fund – an impressive difference of £24,475.

Isas: which equity fund should you choose?
Isas: the pick of the bond funds
Rob Fisher, head of personal investments at Fidelity International, said: “Investing earlier rather than later in the tax year simply gives your money more time to grow in the market over the long run. Our analysis shows that those who have historically chosen autumn for their investment, rather than leaving it to the last minute, could have achieved a highly attractive additional gain, even in a period that included some of the worst market falls in a generation.”

For all Isa investors, the full £10,200 allowance can be invested in stocks and shares, or you can invest up to £5,100 in a cash Isa and put the balance in a stocks and shares Isa. You can open one cash Isa and one stocks and shares Isa in each tax year, with a combined limit of £10,200. These can either be with a single Isa provider, or with two providers.

If you have already invested in a stocks and shares Isa this tax year, you don’t have to invest the top-up in the same shares or funds, as long as you use the same Isa provider.

Many over-50s are already counting down to retirement and will be taking steps to help maximise income when they stop working. There are several good reasons to maximise Isa savings at this stage. While income generated from a pension is taxable, that produced by Isa holdings is tax free.

Although dividend income from shares is not entirely tax free – 10pc is deducted before dividends are paid and this cannot be reclaimed even in an Isa – the income generated by a fund is tax free if it is held within an Isa. Furthermore, while higher-rate taxpayers usually pay an additional tax charge for dividend income via their tax returns, they can avoid this by holding equity investments in an Isa.

Ben Yearsley, from the independent financial adviser (IFA) Hargreaves Lansdown, said: “Using an Isa to shelter income-producing assets makes more of your income tax free. In addition, income from Isas doesn’t need to be declared on tax returns, therefore age-related allowances won’t be affected.

“If you have the means to invest the full new allowance of £10,200, that could easily generate £500 per annum from a combination of equity income or fixed interest. One further point to consider, if you don’t want income now, you can still invest in an income-producing fund and just roll the income up and take it when you need it.”

There are two main ways to invest for income via funds. Equity income funds aim to produce a rising income over time and invest in companies paying good, sustainable dividends. Fixed-interest funds invest in a range of corporate bonds and government gilts to produce a good yield. We asked the experts for their recommendations when choosing income funds for an Isa.

Yields are quoted net of fund charges, as recorded by Trustnet.co.uk, so this is what you actually receive.