NISA’s, ISA’s, Savings Schemes and Investment Bonds. The world of finance is getting more and more complex, but that doesn’t mean you have to get lost in the changes.
The NISA was announced during the March 2014 budget by the chancellor George Osbourne
(ref: NISA announcement in March 2014 Budget) and here, I give you everything you need to know about NISA’s so that you can decide for yourself whether it will work for you after it’s launch on the 1st July.
What Is a NISA?
A NISA is basically a new ISA (individual savings account). It offers the same function as the existing Individual Savings Account, but now limits have been increased so that every individual can save up to £15,000 a year completely tax free.
The Difference between an NISA and an ISA
Apart from the increased limit, the main difference between the NISA and ISA is how you can invest within it.
Instead of having strict limits on the amount that you are able to put into cash and equity, in a NISA you can allocate your funds as you see fit.
If you want to invest the full £15,000 in stocks or in cash, that is perfectly fine, so is any combination in between.
This New ISA gives you more flexibility and provides a greater opportunity to invest your money in the way you see fit.
This is particularly advantageous to individuals who want to invest more than the previous £5,940 a year cash investment limit, but do not want to risk their money on the stock market.
Even if you don’t have the full £15,000 to invest, any level up to that can now be held in cash for as long as you want.
And if you change your mind, the new NISA offers the facility to switch your investment from cash to equity and back again as often as you want. This means you can manage your own portfolio more effectively to address market conditions and changes in your own personal circumstances.
The Disadvantage of the NISA
The main disadvantage to the cash NISA is the interest rate available at the moment.
As with all individual savings accounts, interest rates are currently low, which means the return you achieve may not be anywhere near the levels experienced back when the original ISA was first launched.
But when compared with traditional savings accounts, which are eligible for income tax, the NISA can still provide a much more attractive return.
And if the tax advantages still don’t win you over, then maybe you should look at investing in stocks and shares within a NISA. Though it does carry a greater level of risk than a standard cash NISA, the returns can be much better.
How To Decide Whether the NISA is Right for You
When considering investing in a NISA, the first thing to look at is whether there are any alternative financial vehicles that would make better use of your money.
For example, if you have a mortgage or any other outstanding debt which charges a higher rate of interest than the return on your NISA, then you may want to consider a lump sum repayment as a way of improving your long term wealth. Just make sure there are no penalties or early redemption charges which would negate the benefit of such a decision.
Or, there may be other investment vehicles that would provide you with greater return if you are willing to lock your money up for longer. Again, make sure you are comparing like for like. Some investment vehicles may seem attractive, but if they are subject to tax, the NISA may still come out on top.
But when the return is better than anything else you can find for the level of risk that suits you, and you have no outstanding debts that would benefit from a cash injection, the NISA could well be the ideal investment opportunity.
Cash or Stocks?
Once you have decided that a NISA is the right choice, the next decision is whether you want to invest in cash, stocks or a mixtures of the two.
As a general guideline it is traditionally considered that the longer you are willing to keep your funds locked up, the greater the proportion of your wealth you should consider investing in stocks. This is because, even if the value of the stock does fall, there is a greater amount of time to recover your existing position before you will need to liquidate your investment. And in the long term, the return on equity investment can be considerably more than that of cash.
However, if you are looking to withdraw your money in a shorter time, possibly in the next 5 years, then you will probably want to keep your money more secure and will therefore opt for a greater proportion of your investment in cash.
Reducing the Risk
Even if you do feel the need to invest in a stocks and shares nisa to maximise return, that doesn’t mean you have to put all your eggs in one basket.
Look to diversify your risk by putting smaller amounts into different types of stocks and shares across many markets. This means that even when one part of your investment portfolio is under-performing, other parts still have the opportunity to succeed, ensuring that your overall investment still rises.
But don’t just look at differing industries in the UK, spread your wealth across different countries and geographical regions and look at areas that you think have the ability to grow.
Furthermore, look at lower risk equity types such as different types of bonds. They are many such products that can be included in the New ISA which offer less risk than standard stock, but greater levels of return than cash.
The quicker you place your money into the NISA the sooner it can start working. And with the new flexibility over changing your investment, you can always adjust the finer details at a later date with no problems.
If you have any questions about the new NISA or just need a hand to set one up, speak with an independent investment adviser today.