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New Isa limits. Anyone for a top-up?

The increased Isa limits for over-50s came into effect in October 2009 and present a number of opportunities for advisers to engage with a significant sector of their client base

The increase in Isa limits for the over-50s announced at the last Budget became effective in October 2009 and the early signs suggest take-up will be strong at a time when the inclination to save is high because of the prevailing economic climate and the recent bounce in markets. However, there remain some administrative hurdles with the new scheme so how can advisers ensure they make the most of this opportunity?

The new rules allow anyone aged 50 and over at 6 April 2010 to increase their Isa contribution to £10,200 between 6 October and the end of the current tax year – although the catch is that the top-ups need to go into an existing Isa plan. At the start of the new tax year on 6 April 2010, everyone will be eligible for the higher rate and the full amount can be invested as normal.

The changes are likely to prove popular. According to Peter Hicks, head of UK retail sales at Fidelity FundsNetwork, the day after the changes were announced in the Budget last April the group had a huge flurry of enquiries.

The changes chime with the prevailing mood to save rather than spend - consumers paid back more than they borrowed during July for the first time since 1993. Hicks believes there is also an awareness that taxes are likely to rise and investors need to take advantage of tax shelters where possible. Fidelity’s research suggests that as many as 80% of current Isa investors may use the additional flexibility and, of those, 77% plan to invest in equities (Source: Fidelity Survey conducted in August 2009 with 480 participants).

There has also been increased awareness of the benefits of Isas for pension planning. The 50% tax rate (also announced in the last Budget) means that, for some high earners, pensions saving through an Isa may be more tax-efficient than investing via a pension. The key is the tax rate on the way in, versus the tax rate on the way out. If an investor is only receiving 20% tax relief going in and then is subject to 40% or even 50% tax on the income generated from that pension, then the tax-free income from an Isa compensates for the lack of upfront tax relief.

Isas are also more efficient than the majority of other tax wrappers. Research from Fidelity suggests that, in the case of a higher-rate taxpayer holding an interest-bearing onshore Sterling corporate bond fund, an Isa wrapper will immediately see a 67% higher return than an unwrapped collective fund. It will see a 56% higher return than an onshore bond and a 67% higher return then an offshore bond (Source: Fidelity, Importance of being an ISA whitepaper, Spring 2009). Compounding can make the difference even more marked.

But there are some hurdles. Because of the way top-ups have been structured, they represent an administrative headache for fund management companies, which has left many reluctant to promote, or in some cases offer, top-ups. There is therefore a chance that advisers may not be able to obtain the exact funds they want. That said, most of the major fund management groups have now said they will participate in the scheme and Isas held on a platform will not be subject to the same problems.

Structured products currently held within an Isa wrapper may also present problems. Structured products usually come in tranches and, once investors have bought in, they are often not allowed to add or subtract money. Top-ups will therefore be difficult to effect and number of groups have said they will either not be offering them or will offer a different product.

For advisers, there is also the question of identifying which clients will be eligible for top-ups and ensuring they are notified of the changes. Some of the platforms have taken steps to make the selection process easier. Fidelity FundsNetwork, for example, has a facility to produce reports showing all clients that will be over 50 during the current tax year. “The report can be filtered to identify those clients that have always put the maximum into an Isa,” says Hicks. “It can also show what unwrapped mutual funds are held by clients that could potentially be moved into an ISA.”

While the Isa top-ups may present some administrative difficulties in the short term, advisers are likely to find their clients receptive to sheltering additional cash. It should also help ease the blow for high-earning clients hit on the new income tax and pension rules. With markets riding high, it is also an opportune time to re-engage with clients and remind them that equity investment may just be worth it after all.

 

Pearson Hinchliffe Financial Services | Hollinwood Business Centre, Albert Street, Hollinwood, Gtr Manchester, OL8 3QL
Telephone: +44 (0)161 785 3500, Fax: +44 (0)161 624 2589, Email: enquiries@pearson-hinchliffe.co.uk