The hat trick of government reforms is set to disrupt preferred savings strategies. Will cash ISAs, pensions and stocks and shares continue to be the UK’s choice of investments?
Crowdstacker released data* this month which reveals British saving and investment habits may require a major rethink in the wake of three reforms being introduced by the Government from the start of the 2016/17 tax year.
Innovations and changes such as the Personal Savings Allowance (PSA), pension limits and the new Innovative Finance ISA are all identified as potential disruptors to the way British people traditionally prefer to save and invest.
Brits love Cash ISAs, playing the stock market and pensions but Government reforms could disrupt these investment choices
The research clearly shows the country’s most popular forms of savings and investment are Cash ISAs (51%), pensions (44%) and stocks and shares (26%).
However, with changes afoot, the relative tax efficiency of all of these will be called into question.
The hat trick of Government changes coming in to force on 6th April 2016 could mean that people need to re-order the relative priority of different savings and investment vehicles.
Could you save more with the PSA?
The PSA, for example, looks simple at first glance, but one argument favours this form of saving over other more popular investment routes.
The PSA allows basic rate taxpayers with money in investments such as savings accounts, unit trusts or P2P loans, to earn up to £1000 interest tax free each year. For a higher rate taxpayer, they can receive up to £500 interest without handing a penny over to the taxman. Government figures suggest that 95% of savers will benefit from this change.
Some of these savings and investment vehicles, covered by the PSA, such as P2P investments, are free to set up and free to manage – unlike most Cash ISAs, pensions or stocks and shares. So combined with the tax breaks the PSA offers, this could be a more efficient way for many people to invest their money. Learn more about the PSA in our article ‘Why you need to know about the Personal Savings Allowance’.
You need to check you won’t breach the lifetime pension allowance
The £1 million lifetime pension allowance** comes into force in April, meaning that people could easily breach the limit and fall foul of the 55% tax rate when the time comes to draw it down.
Even middle-range earners will need to consider this in case they need to reformat the ratio of how they allocate their money to savings and investments, to ensure they do not breach the limit.
The new Innovative Finance ISA (also called the P2P ISA) could be worth a look
And lastly, the Innovative Finance ISA, details of which should be finalised by the end of March, is designed to enable investors to wrap their peer to peer investments, up to an annual limit of £15,240, in a tax-free ISA wrapper.***
Now could be the perfect time to revisit your savings and investments to check you have the right balance
As Karteek Patel, CEO of Crowdstacker explains: “These seemingly subtle alterations to taxation on savings, actually cumulatively adds up to pretty fundamental changes - meaning people should be taking some time over the next few weeks to re-evaluate where they put their money and in what order and ratios they allocate it.
“Our research echoes what the industry already knows – people want to save their money into cash ISAs, pensions, and a significant minority are happy to play the stock market in some form.
“Savers and investors utilising these options, to date, have probably been tax efficient and maximised their returns. But when these reforms come in April, that could all change.
“The shake-up means people really ought to revisit their savings and investments to check that they are not missing out on value elsewhere.”
The research was conducted late last year as part of Crowdstacker’s on-going Financial Apathy campaign that seeks to encourage Britons to take a more hands-on approach to managing their money. Top line data suggests the average Brit could already be missing out on up to £1000 a year, even before April’s changes come into force, by simply not actively managing their money.
For example, 40% have never changed pension provider, 21% have never changed bank, and 55% haven’t changed utility provider in the last three years. The research shows that the average Brit only makes changes to their finances once every five years.
So when April 6th comes round it is probably worth ensuring you’ve taken some time to form a holistic view about how these changes affect your personal savings and investment circumstances as a whole. By reading up on the changes and seeking further advice if necessary, you could save yourself a lot of money.
Please note that tax treatment is dependent on an individual's circumstances and is subject to change in the future.
* Atomik Research carried out Crowdstacker’s survey in October 2015 amongst 1007 UK adults
** more information can be found here: www.pensionsadvisoryservice.org.uk/search/results/