Drawing down on ISA's

Franko43

Hi All
Reading loads of comments that people should not draw down on their ISA's if at all possible. At what stage do people think it appropriate to draw down on their ISA's.? I have mine so that in about 15 years time I'll have a nice lump sum to pay off mortgage but I see alot of commentators on the board think this isn't the best possble use.

missile

Do you get a better return on your ISAs than the rate you pay on the mortgage?

Franko43

Yeah - right now my ISA's are returning a far better return but what people seem to be saying is also don't even take the good returns out of the ISA to pay the mortgage, keep them in there. I'm just wondering at what point it's best to make a decision to draw them down, what would the best circumstances be etc..

Aegis

If your mortgage is costing you more than your ISA, then pay off the mortgage from the ISA. If you want to pay off your mortgage in full and have the funds available to do so in your ISA, then use the ISA money (though obviously make sure you understand the pros and cons of such a decision first). If you want to spend your savings on a new car, then tap into your ISA.

Essentially, withdraw money from your ISA when you want to spend it. It's just a savings account, not a long-term investment that you absolutely mustn't surrender at any cost. Sure, the tax-free status is great, but it's only worth having if you actually want to keep saving money.

dunstonh

The long term benefit of ISAs is that you have your money in a tax free environment. With the ISA allowance being limited to only £7000 a year it can take decades to get up to a decent amount and if you go and cash the lot in to pay your mortgage off early you have to start all over again.

If you are a higher rate taxpayer or aged over 65 the benefits of an ISA can be significant and far more important that paying off the mortgage a few years early.

Franko43

Dunstonh - whats the benefits of ISA's to over 65's. I'm a long way off yet but if it makes more sense than paying off the mortgage it would probably be a good idea.

dunstonh

At age 65 you get an increase in your personal allowance (increased further at 75 as well). However, if you earn over £20,900 a year then this age allowance is reduced by £1 for every £2 over £20,900.

Earnings taken into account are state pensions, personal/occ pensions (any pensions basically), dividends and interest, earned income and rental income. Basically, any taxable income.

Income/interest from ISAs is not included as it is exempt.

The age allowance is wiped out fully if you earn over £25,550. The personal allowance is currently £2465 more than the standard £5,225 (it increases a lot in the next few years so the potential loss would be greater still). So, if you take that £2465 @ 22% then you would pay £542.30 more in tax per year.

Plus, as you get older, people in general tend to reduce their risk profile. Stocks and shares ISAs investing in interest paying funds (such as corp bonds, uk other bonds, gilts etc) can reclaim the tax paid if held within an ISA. So, if you are looking to use the ISAs to produce an income in retirement, the ISAs can be truely tax free and boost your income above that of a basic rate taxpayer holding exactly the same investments unwrapped (not in an ISA).

Milarky

Franko43 wrote: »

Hi All
Reading loads of comments that people should not draw down on their ISA's if at all possible. At what stage do people think it appropriate to draw down on their ISA's.? I have mine so that in about 15 years time I'll have a nice lump sum to pay off mortgage but I see alot of commentators on the board think this isn't the best possble use.

A poster here - called Bernie I think - pointed out that if you have an offset mortgage (which you may not as they aren't the best value for borrowers anyway) and ISAs then it is possible to offset the ISAs (cash ISAs that is) just as with ordinary savings. What you 'gain' if you do this is to preserve the tax free status of the ISA - although it doesn't grow either whilst in offset. But that does mean you could re-access the ISA allowances carefully built up over a number of years again if (say) you came into a lump sum that allowed you to redeem the mortgage at a later stage.

But if paying down a (non-offset) mortgage then you have to split your payments between that and maintaining or building any ISAs. Let's face it - it's always going to be a trade off whether to save and if so how and ISAs are most beneficial (like things like premium bonds are) to those with large incomes and accumulated assets already - much less for those working their way through paying bills and the mortgage. With all the places you can save, for most people, ISAs can't even be exploited up to their annual limits so that drawing against these from time to time isn't necessarily going to prevent you replacing it (eg saving £200 per month into a S&S ISA - that's only £2400 per year against an allowance of between £3600 and £7200)