Top 5 Investment Plans for your New £15,000 ISA Allowance
From 1st July ISA rules are changing, one of the most important being that UK savers will be able to put up to £15,000 into an ISA. So with only a week to go until these new ISA rules take effect, now is a good opportunity to review the performance of any existing ISAs you might have, as well as consider options for further investment. For those who want to take advantage of this increased allowance and start protecting their returns from the taxman straight away, our head of savings and investment, Oliver Roylance-Smith, has selected his top 5 investment plans for the New ISA.
New ISA changes in a nutshell
From 1st July 2014, the key changes to ISAs are as follows:
- All existing ISAs become New ISAs
- New ISA allowance of £15,000
- Allocate up to the full allowance in either cash or stocks & shares (investments), or a mixture of both
- Freedom to transfer from cash to stocks & shares and vice versa (Stocks & Shares ISA to Cash ISA previously not permitted)
Don’t miss out
Research suggests that more than one in every four adults in the UK (26%*) is paying too much tax on their savings and investments. With as many as 12.5 million adults failing to make use of a tax-efficient ISA with their hard earned money, they could be losing out by paying tax unnecessarily. Putting money in an ISA is one of the simplest things to do to protect your money from the taxman and with the new ISA rules resulting in an increased allowance and increased flexibility, making sure you don’t miss out should be a top priority.
Top 5 selections
With this in mind and to help you decide how best to make use of this valuable tax break, our Top 5 selections are based on our most popular investment plans, with both existing and new investors. Four of our top 5 are income plans and with a fixed income of 8.04% on offer and the potential for yields of up to 9.44%, it is perhaps easy to see why.
The FTSE 5 Monthly Income Plan from Meteor offers 8.04% annual income (paid as 0.67% each month) which is not only a high level of income, but it is also fixed and therefore paid to you regardless of what happens to the stock market. The trade off for such a high level of fixed income is that the return of your initial capital is dependent on the performance of five FTSE 100 shares rather the Index as a whole. Should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
Fair Investment view: “This investment should appeal to income investors looking for a high level of fixed and regular income and if you invest within an ISA, the 8.04% fixed income is equivalent to 10.05% p.a. for basic rate tax payers and 13.40% p.a. for higher rate tax payers. However, the fact that the return of your initial capital is based on the performance of five shares rather than the Index as a whole makes this a higher risk investment and should be a key consideration.”
Fixed term investment plans that have the ability to mature early or ‘kick out’ each year seem to be particularly popular with investors when the market is at historically high levels, and the Enhanced Kick Out Plan from Investec offers the highest rate of any kick out investment based on the FTSE 100 Index. The plan will return 9.25% per year (not compounded) provide the value of the Index at the end of each year (from year 2 onwards) is higher than its value at the start of the plan – so although the FTSE does have to rise, this only needs to be by a single point. Your initial capital is at risk if the Index falls by more than 50% during the term and also finishes below its starting value, in which case your capital will be reduced by 1% for each 1% fall.
Fair Investment view: “Knowing how to invest when the FTSE is high continues to be a challenge for investors, but with the potential for high returns as early as year 2, even if the FTSE only rises by a single point, perhaps helps to explain why this was our best selling kick out plan over the ISA season. The combination of high growth potential and the ability to mature early could make for a compelling opportunity in the current market.”
The FTSE 4 Quarterly Income Plan from Focus offers the highest potential income of our income plans with up to 9.44% per year. Your income is dependent on the performance of four FTSE 100 companies and a quarterly payment of 2.26% is made provided the value of all four shares at the end of each quarter are at or above 60% of their value at the start of the investment. If one or more shares are below this level, no income payment will be made for that quarter. The return of your initial investment is also dependent on the performance of the same four shares. On the final day of your investment should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment. Credit Suisse is the counterparty for this plan.
Fair Investment view: “Equity investors rarely achieve an income anywhere near 5% and there are signs that dividend yields could be under added pressure, so the opportunity for up to 9.44% per year on offer is appealing. The ability for each share to fall up to 40% and investors still receive an income is also a compelling feature but the fact that income and the return of capital are based on the performance of four shares rather than the Index as a whole should be carefully considered.”
The second entrant from Investec, the Enhanced Income Plan, has been our best selling income investment. The current version of the plan pays a fixed income of 5.40% per year (paid as 0.45% each month) regardless of what happens to the FTSE. Capital is at risk if the FTSE falls by more than 50% during the investment term. If it does, and the Index also finishes below its starting level then your original capital will be reduced by 1% for each 1% fall, so you could lose some or all of your original investment.
Fair Investment view: “The fact that you know exactly how much you will be paid, when and for how long is appealing to both savers and investors and the monthly payment frequency is a popular feature. With your initial capital returned unless the FTSE falls by more than half, this plan offers a competitive balance of risk versus reward that investors know at the outset.”
The FTSE Quarterly Income Plan from Start Point offers up to 6.2% income each year with 1.55% paid each quarter provided the FTSE 100 Index is at or above 85% of its value at the start of the plan. If the FTSE is below this level, no income will be paid for that quarter. The plan also contains some capital protection against a falling market since unless the FTSE has fallen by more than 40%, your initial investment is returned in full. If it has, your initial capital will be reduced by the equivalent drop in the Index. This is measured on the final day of the investment only rather than throughout the term.
Fair Investment view: “With low savings rates and many UK equity income funds yielding less than 4%, the potential for up to 6.2% income is appealing depending on your view of what might happen to the FTSE. Combined with some capital protection against a falling stock market and this plan is certainly worth a closer look.”
ISA transfers and tax free income
All of the plans accept new ISA investments, ISA transfers and non-ISA investments. Remember, Cash ISAs can now be transferred to Stocks & Shares ISAs which opens up another option for savers who are having to face the impact of record low savings rates. From 1st July, Stocks & Shares ISAs can also be transferred to Cash ISAs.
Any income received from an investment held within an ISA is not then subject to tax, thereby resulting in the potential for attractive tax free income. Please note that Stocks & Shares ISAs put your capital at risk and you should always check whether any charges apply on transfer. The preferential tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future.
How to apply
When you click for more information on any of the above plans you will be able to request a brochure pack which will be sent to you by post and email. This will include everything you need to apply. All of the plans detailed have an application offer period which ends after 1st July and so will accept applications for a New ISA. Please refer to the individual plan details for how to invest. Also note that these plans may close early so it is important to submit your application as soon as possible. Application deadlines, minimum investments and arrangement fees apply.
* NFU Mutual, June 2014.
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment of ISAs depends on your individual circumstances and is based on current law which may be subject to change in the future.
These are structured investment plans that are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index or shares listed within the Index. As share prices can move by a wide margin, plans based on the performance of shares represent higher risk investments than plans based on the FTSE 100 Index as a whole.
There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index or shares listed within the Index is not a guide to their future performance.