Should I use our ISA allowances?

thunderroad88

I know, that’s a strange question to which the answer should be yes of course.

But here’s my scenario. My wife and I each have a s&s ISA in which we hold mostly equity funds plus some significant “cash” in mmf or bond fund format. We also have significant cash in various ea and fixed bank deposits  (approx four years) as our buffer from which we draw some income to 
complement a db pension and use to pay for holidays, major expenditure etc. These accounts are all in my wife’s name and she pays no tax and is five years away from having to do so. One of those fixed accounts is due to mature soon freeing up £40k and my plan was to put it into our ISAs for this tax year.

However, we don’t want to put any more into equities in the foreseeable future if at all, so all I’d do is add to the mmfs I think, which won’t provide better rates and is very marginally more risky than if I just put this £40k into another deposit account earning 4-4.5% . There is no tax benefit to putting it into our ISAs as we won’t pay tax on it anyway, so I’m wondering whether there’s any need to do it. The only benefit I can really see is if we did in future want to increase equities the cash for them would be wrapped already, but if we didn’t do that to next tax year we’d have next year’s allowance available anyway.

Should it be a no brainer that I ISA protect this cash and not even be querying the fact?

jimjames

No it's not automatically a no brainer, it can depend on circumstances as you've outlined. However bear in mind that the ISA allowance could be reduced so the limit would only take a smaller portion of your money. Equally interest could become taxable if the allowance dropped or the previous situation where all interest was taxed at source came back. As you've said you need to look at the future cash flow and if you might want to use the ISA in other years and if there would be enough space for that cash to avoid taxable income. If that all works out then no need to use it now but if there was little difference in rates then I would probably secure the ISA allowance in the knowledge you can remove it from a flexible ISA in future if needed.

masonic

There have been some pretty good cash ISA offers launched in 'ISA season' around the end of the tax year, so you may see something to tempt you then.

Personally, I was in the same boat as you this year, with a lot in equities and wanting to reduce risk somewhat. I ended up going for a cash ISA because I was concerned about the speculation that the subscription limit would be cut. But also, I do pay tax on some of my interest.

It depends somewhat on how much you might have available to save in the future. I don't think there will be any impending restriction on contributing money to a S&S ISA, even if the limit specific to cash ISAs is cut.

Notepad_Phil

Personally I can see why you're in two minds over the usefulness of putting more away in ISAs, but there is always the chance that the amount of new cash allowed to be added to ISAs could be reduced at any point in the future, so I'd definitely be making full use of them now - especially as the 5 years to your wife's retirement is not too far away, at which point I'd personally want to have as much sheltered away as possible (assuming ISA rates are not too different from non-ISA ones).

cantbelieveit23

I would agree with Notepad_Phil.  Given your tendency to reduce risk, Cash ISA, especially with the threat of a smaller tax-free allowance.  Makes sense to use that while you can, as your tax situation will change relatively soon.

thunderroad88

masonic said:

There have been some pretty good cash ISA offers launched in 'ISA season' around the end of the tax year, so you may see something to tempt you then.

Personally, I was in the same boat as you this year, with a lot in equities and wanting to reduce risk somewhat. I ended up going for a cash ISA because I was concerned about the speculation that the subscription limit would be cut. But also, I do pay tax on some of my interest.

It depends somewhat on how much you might have available to save in the future. I don't think there will be any impending restriction on contributing money to a S&S ISA, even if the limit specific to cash ISAs is cut.

Good point on cash ISAs…I’ve never really considered them since we retired as we’ve been able to put all our savings under my wife’s name in accounts with better rates and pay no tax, but they’re an option worth thinking about. I suppose the question is whether mmf returns in our ISAs will match or nearly match the best deposit account returns as they can provide virtually the same accessibility to funds and offer the option of being future dry powder if we find that down the line our various db and state pensions are providing more than enough income thereby enabling us to put more into equities within our ISAs if we wanted to. I guess we can shelter it for now and always take it out in future if needs be, but if we don’t use the allowance in this tax year it’s gone forever.

masonic

MMF are typically good when interest rates are rising, and not so good when they are stagnant or falling. They are good for those who don't want to actively chase the best rates. But if you do then the ~4% they are likely to generate going forward from here can be beaten.

Obviously having to transfer a cash ISA into your S&S ISA is an extra step you'd have to take if you did want to rebalance into equities, but typically such transfers are fairly quick and painless. I had to transfer in a couple of ISAs during the pandemic to take advantage of the crash, and was fairly impressed with the timescales considering all the additional challenges of the time!