ISAs have lost their appeal over the years, due to waning interest rates and other tax breaks that mean some savers don’t need an ISA to avoid paying tax on savings interest. However, they shouldn’t be written off just yet as they do still play a role in financial planning for doctors and dentists.
This does not constitute advice and advice should be sought in all instances before acting on it.
Has the sun set on ISA’s?
2019 marked twenty years of tax free savings. However, in recent years, ISA’s have been on the decline.
In 2018/19, ISA subscriptions were approximately a fifth lower than in 2014/15. There are a couple of good reasons for this:
(1) Firstly, the personal savings allowance introduced in 2016, means many savers do not need to shelter their savings from tax in a cash ISA. Interest rates on savings have declined to almost zero in recent years, which has had a compounding effect on this.
(2) Secondly, alongside the personal savings allowance, the dividend allowance was introduced, allowing £2,000 of dividends, tax-free. This means that for investments into share-based funds, there are no income tax savings from utilising an ISA.
Plenty of cash still invested
HMRC reported £270 billion held in cash ISAs in April 2019. Despite the low interest rates available to savers, cash ISAs still made up 46 percent of the the total value of all ISAs at this time. In addition, 65 percent of all new ISA subscriptions in 2018/19 were to cash ISAs, showing investors are generally opting for the flexibility of withdrawal, over higher returns that can be possible with a Stocks & Shares ISA.
The total amount held in cash ISAs in April 2019, was reasonably static for three years prior, which suggests that savers were broadly matching withdrawals with investments.
Where ISAs still play a role for doctors & dentists
Lifetime ISAs have not been very successful, with 2018/19 figures showing less than one percent of ISA investment was to a LISA.
However, there are a range of ISA accounts still available and they continue to play a role in financial planning for doctors and dentists. This is primarily because your investment income will frequently exceed the personal savings allowance and the dividend allowance, and other tax breaks, such as the CGT annual exemption, will also often be fully utilised from other transactions.
The nature of ISAs is changing though. Due to the tax saving benefits, they were once considered the investment you could just sit back and let accumulate, which may not be quite the case in the current market.
It is a good time to sit down and speak to your financial advisor if you have an ISA portfolio that hasn’t been reviewed in a while, to ensure it is performing.
Time to review your ISAs?
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