The verdict on ISA innovations
New features and products have been making their presence felt in the ISA market, but advisers need to make sure they are understood by clients.
In recent years, we have seen a number of new features and products in the ISA market. From April 2015 Additional Permitted Subscriptions (APS) became available, April 2016 saw the start of Flexible ISAs and the launch of the Innovative Finance ISA, and two years ago we saw the introduction of the Lifetime ISA. So, what has been going on now that these products and features have bedded in?
Slated by many as muddying the waters between pensions and ISAs – and misnamed for those who use it solely for house purchase – the Lifetime ISA also has its fans for encouraging more young people to save. If that is the intended purpose, it has obvious benefits over Help to Buy ISAs.
The Lifetime ISA allows contributions up to £4,000 a year, with a 25% bonus paid monthly. You can transfer to a Lifetime ISA from other types of ISAs, which will count against your Lifetime ISA limit but will not use up any more of your overall ISA allowance. Also, the contentious withdrawal charge appears to be working effectively to put people off taking their money out other than for house purchase.
Even if you’re not a fan of the Lifetime ISA, it is worth considering for eligible clients who may be purchasing a first house in the next few years. The account must have been open and funded for a full 12 months before funds can be withdrawn for a property purchase.
However, there is nothing to stop an account being opened with the minimum funding required by the provider and then left indefinitely. This not only gives the account holder the ability to fund until they turn 50, but also starts the 12-month clock.
Clients who want to save but do not want to be restricted on withdrawals can continue using cash or stocks and shares ISAs as appropriate. If they then decide to purchase a qualifying property, they would have the ability to transfer in £4,000 from those other ISAs and get a £1,000 bonus to help with the property purchase.
It is not a huge amount but it could be doubled if you have a couple of first-timers who are buying together, then doubled again if you go through the process over the tax year end. Remember, when making ISA transfers, the current year’s subscriptions must be kept together, whereas previous years’ can be split.
Nearing their third anniversary are the Flexible ISA and the Innovative Finance ISA.
The Innovative Finance ISA had a slow start, with only a handful of providers offering it in the first year. However, there are now 40 providers in this space, so it is a growing market. Flexibility is a feature, rather than a type of ISA, and it is optional for managers to offer this. If flexibility is something your client is likely to need, you should check first. It is more widely offered on cash ISAs as this is where the highest demand lies.
The APS has had a low take-up but there will, of course, be cases where the APS is not required – where the survivor is not using their own allowance and the deceased’s ISA value will be within it, or when the funds are used for other purposes. However, there must also be a significant number who could benefit but are not using it.
Since 6 April 2018, when the APS rules became more generous, when an ISA holder dies, their account becomes a “continuing account of a deceased investor”. The tax advantages remain until the earlier of the account being closed, the administration of the estate being completed, or three years.
The amount of the APS can be either the value at the date of death or the date the account stops being a continuing account. This allows the surviving spouse to in specie transfer all the assets of the deceased’s ISA to their own ISA without using any of their allowance.
The popularity of ISAs has historically been put down to their simplicity to understand. As layers of complexity are added, it is important they are still understood so that clients do not lose out.