Should I abandon ISA's

trickydicky14

Come next April I will have stopped working and what with the £10,500 personal allowance and the new £5,000 0% starter tax band giving me £15,500 I should not be paying tax. I will receive a tiny pension of £5,000 per year and about £4,000 interest on savings and that’s it until I am 66years old when I will get another small pension plus state pension. Even if I did work one day a week I would still be just under the magic number.
So my question is this, should I now abandon the idea of using ISA’s and also allow current fixed term ISA’s to run out and reinvest in other savings / current accounts with better returns knowing I will not have to pay tax? Currently I have about half of my savings in ISA’s (£75,000).

bowlhead99

If you have no tax to pay on your income then there is no advantage to be gained by using a tax-privileged account where you get paid gross. Because you get paid gross anyway.

In the current market environment, better rates can be found outside ISAs and so if you are restricting yourself to holding your 75k in ISA accounts only, you are missing out on money the banks and building societies are willing to give you.

The negatives to doing this are

a) if you find yourself in the situation of being a taxpayer at some point in the future due to some other unexpected income source (employment, or much larger investment returns after getting an inheritance for example), then it will take you a few years at 15k per year to stuff some of your money back inside an ISA wrapper.

b) if the savings market conditions change again so that banks start to pay higher rates on ISAs (knowing the amounts that can be deposited in any one year are restricted by HMRC, it naturally caps the bank's costs of paying a high rate, so they used to do this) - then it will take you a while to get the cash wrapped up again as mentioned above.

I assume the risk of a) happening is pretty low?

The risk of (b) happening is also probably relatively low, because of the increase in ISA limits and flexibility - so ISA accounts are not as restricted as they used to be and so it is more expensive for banks to offer good ISA rates because there is more qualifying money they might be paying out on. And even if they do improve ISA rates, the banks will assume they can get away without giving the very top rates possible because most people with ISAs are saving tax and don't need the absolute best return because with the tax savings they still stand up well to an unwrapped saving account.

For you, the tax saving offered by an ISA is worthless and so probably you can abandon ISAs with impunity. But it is worth considering carefully when you are throwing away a big tax shield graciously given to you by HMRC. They will not be keen to give it back if you change your mind. As a non tax payer with no plans to use stocks and shares investments (for which an ISA is handy, but not essential if you are a low or nil rate taxpayer) this probably doesn't bother you.

trickydicky14

Thanks bowlhead99,
Thank you for your reply it was similar to my thoughts and conclusions. The next obvious question is what to do with £75,000 as and when it becomes available, currently the rest of my savings are in the much talked about current accounts Lloyds, TSB, 123, Nationwide, NS&i….I wont go on. As I am almost 60 years old I feel it is too late and too risky to think about the stock market plus my knowledge is minuscule.

robotrobo

trickydicky14 wrote: »

Come next April I will have stopped working and what with the £10,500 personal allowance and the new £5,000 0% starter tax band giving me £15,500 I should not be paying tax. I will receive a tiny pension of £5,000 per year and about £4,000 interest on savings and that’s it until I am 66years old when I will get another small pension plus state pension. Even if I did work one day a week I would still be just under the magic number.
So my question is this, should I now abandon the idea of using ISA’s and also allow current fixed term ISA’s to run out and reinvest in other savings / current accounts with better returns knowing I will not have to pay tax? Currently I have about half of my savings in ISA’s (£75,000).

hi.
First of all i am not a boffin , and im not a tax payer , because i do not earn over the personal allowance.
If i had not invested in isas all the previous years , then i would now be a tax payer as my income would be above the personal allowance.
When i recieve any letters from the inland revenue to fill in , its nice to read that any isas do not need to be declared.
I know that interest rates are not good, infact in a few days time i have a £15.000 bond matures that i invested some years ago , so i am putting that alongside my existing isas in santander at 2.3%, alongside all my others that i have accumalated since the launch of tessas/ isas some years ago.
OK times are not good for the saver , but keep your money away from the taxman & more importantly is that it may change for the isa market in the future. Like you say ,Stay under the magic figure, i have 2 santander 123 accounts that pay £100 a month interest , as well as first direct, york bank , nsi indexed 5 yr bond etc etc . just remember not to have more than £85000 in the same bank,
my o/h is a marginal tax payer £800 last year , but he has the same 80000 in isas earning £80 interest monthly.
SO I am in the same dilema as you now , but i can tell you i will be holding on to my free tax isas , so that you do not have to declare to the tax man.

bowlhead99

Well, if you have already maxed out the best current account deals (which you'll have seen all over these forums and are mostly covered by what you've mentioned) then the only super safe (i.e. cash) options are savings accounts: picking the 'best buy' tables seen on this site, other sites and the weekend newspapers - and taking the trade-off between short fixes of a year or so and longer fixes for a slightly better rate (which might get beaten by another rate shortly after you lock into it).

You mention 75k ISA is about half your cash and so I'm assuming the total pot is 150k, and the 4k you expect to earn from the lot is about 2.7%. That's achievable gross on the first half of your money using all the top deals you mentioned (and assuming you keep looking around for more, and assuming that more keep coming available), but you will probably average down to that level once you deploy your ISA money into lower paying accounts with other providers.

If you have over 75k in cash outside the ISAs and do not need to burn through it too much while waiting for pension 2 and state pension (other than having it eroded by inflation while you spend all the interest it produces), then I would suggest you might be able to use some of the other half of your money (the current ISA pot) in investments. The income and capital from this would move up and down over time but with a large cash buffer you would still be able to access whatever amount you need to live on, out of the cash buffer, until your other pensions kick in. Of course it may all depend on whether you can actually live on your 9k a year income or whether you are planning on pulling another 10k capital on top every year to meet your spending requirements between 60 and 66!

In practice, stockmarket-based investments are the only way to get a return that can deliver a long term return ahead of inflation so that you can spend the income produced without eating into the capital. The downside as mentioned is that their value can jump around a bit. It is shortsighted to think that 'almost 60' is too late to think about the stock market, if you are going to live another 10, 15, 20, 30, 35 years? And certainly if you are retiring some point soon, you will be able to devote the standard 40 hour working week, plus evenings and weekends, to improving your 'miniscule' knowledge and stop the issue being so daunting.

Or, you could just put your head in the sand and hope that somehow banks will start to pay you above the rate of inflation for you just giving them money to hold while not taking any risk. They are unlikely to want to do that. So, they will be only paying you inflation or less on your cash deposits, and if you spend any of the interest they send you, your pot will diminish in real terms until the interest payments stop being big enough to live on. Therefore, some consideration of investment fund options is necessary IMHO.

Another thing to consider is that when you become eligible for state pension in 6 years you don't actually have to take it, you could defer instead. That might sound like madness but if you have got yourself used to living on only your first pension and a bit of saving/investment income, you might be able to ignore the state one for a year or two which would be a potentially lucrative opportunity to consider.

Difficult to comment more even if we had more information as everyone has their own preferences and ability to handle risk. Everyone wants to know what is the 'best' thing to do as they get to retirement. For a given amount of money and a given spending pattern, what is the best return for the least risk. Well the best return has the most risk and the least risk has the least return. You have already identified some of the best paying zero risk cash accounts and are already using them. Usually people should have some mix of cash deposits and safer investments and riskier investments. And if the spending pattern is using up the money too fast, try and economise.

colsten

As you cannot get a better rate in current accounts for much more than £40,000, it doesn't seem sensible to ditch the ISA protection you have built up over the years.

It is probably also fair to assume that you don'y need all your £75,000 immediately, so you can fix some of the money for 2, 3, 4, 5 years, couldn't you? The ISA rates you can get for longer commitments are obviously higher.

If you are no longer a tax payer, you can get the interest from other accounts gross by filling in R85 forms. There is a £5,000 a year limit but you wouldn't get near that sum even if you could get 5% on all your savings.

pip895

I agree with Bowlhead - don't abandon your isa - consider using at least some of it on a S&S isa. It really isn't rocket science and at 60 you probably have a longer investment horizon than the average 20 year old who will probably need to withdraw funds for a house deposit or starting a family. I'm in a similar age bracket to you and only started investing seriously about 4 years back. You can reduce your risk by drip feeding funds in over a period - you will get plenty of advice on here about how to go about it.

Biggles

What's this 'new £5,000 starter tax band of 0%'? I can only see the starting rate of 10% on savings of up to £2,880 on the HMRC site.

Archi_Bald

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293747/Fact_sheet_template_-_10__tax_9.pdf

Biggles

Archi_Bald wrote: »

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293747/Fact_sheet_template_-_10__tax_9.pdf

Oh, I see, from Apr 15. No wonder it made no sense to me when looking in the current year's rates.

To be fair, the OP did say 'come next April', but I thought that only referred to his working situation.

trickydicky14

Bowlhead, Robotrobo, colsten & Pip895
Thank you all for your wise thoughts, some interesting things to think about. The one thing that stands out is the view that the only serious way to make good long term returns is via the stock market and this view runs through many discussions on this informative site. The thing now is how to educate myself in the black art of the stock market, any tips on places to look 'keep it simple to start with please'. Am keen to dip my toe in the water as I feel I have a least six years to invest without needing the money and i like a challenge