A stupid move?

srcandas

bigadaj wrote: »

Unlike the religion of the evil IFAs.

Yeah I understand they gather in covens plotting evil and eating babies.

Present company accepted of course :rotfl:

innovate

Excepted?

But accepted, lol.

gkerr4

i think they 'do' make a big deal.

Like you i thought the same a few years back - but then started taking the max cash allowances every year for the wife and i - we also use the remainder in S&S and i'm moving my "trading" account money into the tax shelters also.

It doesn't "seem" a big deal - but if you ever come into some money - for whatever reason - a house sale perhaps or some inheritance - and start earning a few grand a year from interest (even these rubbish savings accounts) and you are a 40% tax payer - then you soon grudge (as i do) settling up with HMRC at the end of the year.

another way of looking at it, is that a 2.7% ISA has the equivalent interest of a 4.5% paying account for a 40% tax payer. (3.4% for a basic rate payer)

i can barely wait to get another £11k into the shelter this weekend!

srcandas

gkerr4 wrote: »

i think they 'do' make a big deal.

Like you i thought the same a few years back - but then started taking the max cash allowances every year for the wife and i - we also use the remainder in S&S and i'm moving my "trading" account money into the tax shelters also.

It doesn't "seem" a big deal - but if you ever come into some money - for whatever reason - a house sale perhaps or some inheritance - and start earning a few grand a year from interest (even these rubbish savings accounts) and you are a 40% tax payer - then you soon grudge (as i do) settling up with HMRC at the end of the year.

another way of looking at it, is that a 2.7% ISA has the equivalent interest of a 4.5% paying account for a 40% tax payer. (3.4% for a basic rate payer)

i can barely wait to get another £11k into the shelter this weekend!

Clearly if you inherit a large some of money and you want to put large amounts in cash accounts and you are a 40% tax payer you have a problem How does previous ISA behaviour help?

Taking your example can you calculate how much we are talking about for someone who didn't have previous savings in ISAs? I can tell you it won't be very much

bowlhead99

srcandas wrote: »

Clearly if you inherit a large some of money and you want to put large amounts in cash accounts and you are a 40% tax payer you have a problem How does previous ISA behaviour help?

Sure, you can say it's a nice problem to have, but it's still a problem.

Previous ISA behaviour helps because if you have discarded a lifetime tax-exempt wrapper one year, you can't simply put more into that wrapper the next year because you run out of allowance. You will have some of your assets stuck outside the tax wrapper. This wrapper allows you to hold tax-free cash (or shares/funds, because cash ISAs can be transferred into S&S ISAs) for the rest of your life.

If you discard it to chase the best deal one year which currently happens to be outside a wrapper, you might not have the chance to put it back in.

Taking your example can you calculate how much we are talking about for someone who didn't have previous savings in ISAs? I can tell you it won't be very much

Say you did not have previous ISAs because you had cashed them out to allow you to 'work the system' in taxable 'regular saving accounts' or 'high interest current accounts' on a short term deal which won't last forever. Keeping it simple say a couple of years cash ISA allowance, or one year self and partner, round it down to £10k ISA allowance lost forever. In a year, on a couple of percent, total interest is only a couple of hundred quid so the tax saved is not very much, who cares, right?

Then you get your inheritance or redundancy payout or lottery win or house downsize or whatever so you have enough to max ISA limits in future years, but have the £10k stuck outside the wrapper because you threw away the allowance. The short term 'high interest non ISA account' is not available as that particular marketing campaign is finished. Interest rates return to their long time average - which is upwards, because the rates we are currently seeing are literally all-time lows. So let's say savings rates, ISA or not, go back up to 5%.

The 40% taxpayer nets 3% from his 5% non-ISA, turning £10,000 into £18,061 over 20 years

The 40% taxpayer would have netted 5% from his 5% ISA, turning £10,000 into £26,532 over 20 years.

You may argue that the £8.5k extra through having not discarded the tax wrapper is 'not very much' because it's in year 2033 pounds rather than 2013 pounds. Maybe so. I would contend that the £26,532, being 47% higher than the £18,061, is the better number to retire on, or pass on to children, or blow on a holiday, whatever.

srcandas

bowlhead99 wrote: »

Sure, you can say it's a nice problem to have, but it's still a problem.

Previous ISA behaviour helps because if you have discarded a lifetime tax-exempt wrapper one year, you can't simply put more into that wrapper the next year because you run out of allowance. You will have some of your assets stuck outside the tax wrapper. This wrapper allows you to hold tax-free cash (or shares/funds, because cash ISAs can be transferred into S&S ISAs) for the rest of your life.

If you discard it to chase the best deal one year which currently happens to be outside a wrapper, you might not have the chance to put it back in.
Say you did not have previous ISAs because you had cashed them out to allow you to 'work the system' in taxable 'regular saving accounts' or 'high interest current accounts' on a short term deal which won't last forever. Keeping it simple say a couple of years cash ISA allowance, or one year self and partner, round it down to £10k ISA allowance lost forever. In a year, on a couple of percent, total interest is only a couple of hundred quid so the tax saved is not very much, who cares, right?

Then you get your inheritance or redundancy payout or lottery win or house downsize or whatever so you have enough to max ISA limits in future years, but have the £10k stuck outside the wrapper because you threw away the allowance. The short term 'high interest non ISA account' is not available as that particular marketing campaign is finished. Interest rates return to their long time average - which is upwards, because the rates we are currently seeing are literally all-time lows. So let's say savings rates, ISA or not, go back up to 5%.

The 40% taxpayer nets 3% from his 5% non-ISA, turning £10,000 into £18,061 over 20 years

The 40% taxpayer would have netted 5% from his 5% ISA, turning £10,000 into £26,532 over 20 years.

You may argue that the £8.5k extra through having not discarded the tax wrapper is 'not very much' because it's in year 2033 pounds rather than 2013 pounds. Maybe so. I would contend that the £26,532, being 47% higher than the £18,061, is the better number to retire on, or pass on to children, or blow on a holiday, whatever.

And then calculate the odds of you having this problem ( allowing use of pensions to help with 40% tax). And compare that to the number who will not have a 40% tax issue under these circumstances.

My point is that these frequent rules of investing do not always and in many cases do not often apply - certainly as I said in the shortterm.

Yes you can think of examples where they do and I can think of examples where they don't.

And where we are looking at investments as opposed to savings with CGT allowances the benefits are even less.

And as you rightly point out a gain when younger in life is often worth far more than later in life, not just in value based on currency but what it may allow you to do.

Don't get me wrong ISAs are good under the right circumstances and certainly help with administration and in some cases saving habits.

Doubt we are arguing over much. I just get concerned with goldenrules that must be obeyed :beer:

bowlhead99

You can run the numbers with 20% tax instead of 40% tax and obviously the tax benefit is lower but still compounds up if you let it. And 20% lower rate is not necessarily the long term average. If they changed it to 25% with lower NI contributions, a tax wrapper for your unearned income is more useful.

You're right about investments, CGT allowances being beneficial but long term total return from shares does have a large compound income component (whether you take it as income units or acc units) and CGT planning can be a headache nicely saved with an ISA.

None of this means we see 'maxing an ISA' as a golden rule - same as you don't need to max pensions if you have something better to use the cash on - the point is just to look both short and long term for any decision which is a sensible rule for life anyway.

gkerr4

bowlhead99 wrote: »

Previous ISA behaviour helps because if you have discarded a lifetime tax-exempt wrapper one year, you can't simply put more into that wrapper the next year because you run out of allowance. You will have some of your assets stuck outside the tax wrapper. This wrapper allows you to hold tax-free cash (or shares/funds, because cash ISAs can be transferred into S&S ISAs) for the rest of your life.

this is exactly it^^

also - i'd have thought it meant "even more" in investments as you could trade that S&S ISA to a million pounds if you were skilled and lucky - and not pay a penny in tax on it.

a valid point on the 'numbers' who find themselves coming into some cash and being a 40% taxpayer (although as the threshold drops over the next few years, more and more will be upper rate tax payers - sigh, it used to be an exclusive club :-) ) but still, i can't think of a reason 'not' to use a tax wrapper if you have some savings. Its not like there are some very high return accounts to tempt you away.

srcandas

gkerr4 wrote: »

a valid point on the 'numbers' who find themselves coming into some cash and being a 40% taxpayer (although as the threshold drops over the next few years, more and more will be upper rate tax payers - sigh, it used to be an exclusive club :-) )

Still fairly exclusive, about 5%, but I take your point

p00hsticks

T3B3 wrote: »

Thank you for the reply :j

Even if they withdrew the 5% I could still make more with other current accounts i.e. Santanders 123 @ 3%.

Are you a basic rate tax payer ?

Don't fall into the trap of doing a straight comparison of ISA and non-ISA interest rates. Both will be quoted gross, but the non-ISA ones will then have tax deducted on the interest, which a lot of people fail to take account of when doing their comparision.

So if you're a basic rate tax payer, that 5% Flexacount actually only pays 4%, and the Santander 123 account 2.4%. If you are a higher rate tax payer ,then the rates drop to 3% and 1.8% - in which case the Santander account isn't a better bet than your NS &I ISA.