Not quite “Philisan fortifies the over forties” but a recent change in the rules for Individual Savings Accounts (ISAs) could give a boost to tax-efficient savings for older people.

Anyone over 50 can, from 6th October 2009, make total ISA investments of up to £10,200 for the current tax year (younger people will have to wait until next April to do so). So those who have already put in the previous maximum of £7,200 should now be able to add another £3,000 (£6,000 for a couple).

Why use ISAs?
ISAs can make a significant contribution towards tax efficient long-term savings. After all, money within an ISA grows free of UK taxes on capital gains and income (except the 10% withholding tax on dividends from UK companies – Gordon Brown, when Chancellor, kindly removed the right to reclaim this within pensions and ISAs).
This is, of course a benefit to most investors and one that can make quite a difference to the rate at which funds can roll up over longer periods.

Unlike pensions, which receive tax relief on contributions, ISA investments are made gross. But how monies are treated when benefits are taken also differs dramatically. Pension schemes can only pay out 25% of their value free of tax, after age 50 (rising to 55 on 6th April 2010); the balance of the fund must be used to provide an income, at least by age 75. And on death (unless a reversionary spouse’s income has been provided for) the money is lost altogether (or very heavily taxed if an alternatively secured pension is in use).

ISAs, on the other hand can pay out a lump sum or income totally free of tax, at any time. And on death, any money that has not been paid out is still the property of the estate (although personal representatives will have to account for tax on any income or gains arising after death).

Cash or equities?
ISAs can hold a range of assets including shares, government bonds (with more than 5 years to run) and insurance policies as well as cash. This means that investors have to decide how much to put into equities and how much (if any) into cash.

The rules allow investors to put up to half their annual ISA investment allowance into cash and the balance into equities (including bonds and life policies*).
Because of current market conditions, some investors may be concerned about placing all their money into equities at the moment, in case of a market reversal – there will be one, of course, there always is; it just depends how deep and how long it lasts before the next upturn!

Switching later
Fortunately, the rules permit investors to put money into cash now and then switch it into equities at any time in the future without affecting the investment allowance limits for the year in which a switch is made. It is not, however, possible to switch from equities to cash. 

This means that investors can, if they wish, hedge their position by using up their entire investment allowance now, but defer some investment decisions until later.

It is important to take professional advice before making any decision relating to your personal finances. As ever the value of investments is not guaranteed and will fluctuate; you may get back less than you put in.

* In theory, some life policies could come within the cash component, but this is unlikely because of the way they are structured.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.