Why more doctors should be using their ISA allowances
In recent years, the pensions landscape has been ever-changing. Reduced savings limits, new rules and government schemes and effectively, more hoops for doctors to jump through. The substantial cuts to the once generous lifetime and annual allowance limits have caused the most concern and driven a renewed enthusiasm in ISAs as a supplement to private pensions.
ISAs are particularly tax-efficient for higher-rate and additional rate taxpayers compared to conventional savings accounts. Funds grow free from income tax (other than the dividend tax credit which cannot be reclaimed) and are not subject to capital gains tax (CGT) on disposal. They allow senior medical professionals – who have been most affected by the recent pension changes – to save in a highly tax-efficient manner.
There are now several different types of ISAs available to savers, each with their own pros and cons so careful consideration should be given to which product is right for you. As well as the original cash or investment ISAs, there are products which help with property purchases such as the Lifetime ISA and Innovative Finance ISAs which deal with peer-to-peer lenders or crowdfunding websites. The latter might be topical but are more risky as they are not yet covered by the Financial Services Compensation Scheme.
As ever, when choosing the right product, it is important to look at the detail – watch out for short-term bonus interest rates, limits on withdrawals and transfer penalties. And check your historical ISAs – it is quite possible that a cash ISA from a few years back is no longer earning a competitive return with some rates dropping to as low as 0.1 per cent. However, it is simple to transfer the cash savings to a new provider or into an investment (or non-cash) ISA.
Investment ISAs are a popular choice to complement traditional pensions and offer the potential of greater returns over the longer term. They are essentially a wrapper within which it is possible to hold a wide range of investments that can be tailored to an individual’s attitude to risk and can hold a mixture of asset classes for diversification.
The current ISA allowance is £15,240 per person per year (for anyone over the age of 18) rising to £20,000 for 2016-2017. The Treasury has announced this limit will increase in line with inflation each year (as measured by CPI). You can save the full amount into an Investment ISA or can split the allowance between cash and investments.
To give an idea of the scope of savings which could be achieved, if a saver maximises his or her Investment ISA allowance each year over the next 20 years (allowing for inflation at 2.5 per cent), he or she could amass a total of £393,150 if 3 per cent growth per year is achieved (equating to £239,317 in today’s terms) or £480,134 at 5 per cent growth per year (worth around £293,011 in today’s terms).
A 45-year-old doctor facing harsh tax penalties for making surplus annual or lifetime pension contributions might choose to pay into an ISA instead. Having built up a significant pot by the time they reach 65 they could draw down on this tax-free (under present legislation) and enjoy an additional retirement income to the NHS pension. Using a spouse’s allowance as well could mean significant extra funds are available to enjoy in later life.
For detailed advice in this area, please call one of our advisers on 020 7636 7006.