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The new ISA explained

George Osborne gave savers a Budget-day boost by announcing significant reforms to the ISA system. We look at what the changes mean for you.

Rainbow and a pot of gold

The ISA revolution announced by Chancellor George Osborne in his 2014 Budget speech appears to have caught everyone by surprise.

Many campaigners had been calling for more generous ISA rules to make up for the years of low interest rates since the financial crisis started.

But even they did not expect the government to take on board their demands to this extent.

ISAs: What is going to change?

Under the current ISA system, everyone gets an annual savings allowance. Until the end of this financial year on 5 April, the allowance is £11,520.

The whole £11,520 can be invested in a stocks and shares ISA, or up to half of it - £5,760 - can be deposited into a cash ISA, with whatever's left over put in shares or investment funds.

The main change announced by Osborne is that these two types of ISA will be replaced with a new ISA, which can contain any combination of cash or stock-market investments.

And from 1 July, when these changes come into effect, the total allowance will rise by almost a third to £15,000.

For savers who deal exclusively in cash, this means their current maximum allowance of £5,760 will almost treble to £15,000.

What's so good about ISAs?

ISAs are supposed to encourage saving because they are tax-free.

This means that the interest on an ISA savings account is not liable for income tax, as it is on a normal deposit account, while the returns on stock-market investments will not incur capital gains tax.

At present, with low interest rates, the potential gains from a cash ISA are low.

If you had £15,000 in a bank account paying 1.5% a year, the total annual return would be £225.

At the basic rate of income tax of 20%, this would lead to £45 being deducted for tax if this was a standard account - so that is what you would save by putting your £15,000 in a cash ISA instead.

If rates were 4%, however, the annual return would be £600, and the potential tax saving would rise to £120.

If you had several years' worth of ISA allowances, the tax advantages could be significantly larger.

End of ISA transfer restrictions

The introduction of a new single ISA means that holders will be able to move their money between cash and shares without restriction.

At the moment, cash ISA savers are allowed to move money into shares ISAs without losing any of the tax advantages, but transfers in the opposite direction are not allowed.

So if you want to sell your shares ISAs in future, you will be able to do so and move the whole amount - regardless of whether it exceeds your annual allowance – into a cash ISA.

This might be particularly useful if you are approaching retirement and want to reduce the risk in your savings portfolio.

ISA simplification welcomed

Nerys Lewis, head of savings at Confused.com, says: "It's great news for savers that ISAs are being simplified.

Piggybank"The current system with separate cash and stocks-and-shares accounts is overly complicated.

"So being able to use 100% of the allowance as a cash ISA should mean that more savers will benefit."

Lewis adds that while not everyone is in a position to be able to save £15,000 a year, the change could lead to greater competition among savings account providers.

"If that happens, everyone will be able to benefit from higher interest rates."

New pensioner bond

In a related announcement, Osborne said that the government-backed bank National Savings & Investments would introduce a number of fixed-rate savings bonds at the start of 2015.

These will be available only to savers aged 65 or above, but are expected to pay a higher rate of interest than is available from rival banks and building societies.

The bonds will be limited to £10,000 per person, and are likely to last for either one or three years, with the rate of interest fixed over that period.

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Chris Torney

Chris Torney

Chris is the former personal finance editor at the Daily Express. He's been a journalist for more than 10 years and contributes to a wide range of finance and business titles.Read more from Chris



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