This can be seen by the significant changes to the way that tax relief is given on pension contributions, including reductions in the amount that can be contributed and also the amount that can be accumulated within tax efficient pension schemes.
This is also evident by the withdrawal of lower risk investments such as solar and other renewable energy projects, as well as the removal of many asset-backed businesses from other savings vehicles such as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).
One of the few, non-contentious, tax efficient savings vehicles that remains available is an ISA. ISAs provide the opportunity to shelter both income and capital gains from taxation and allow for a wide range of different assets to be held. Although there are limits on how much can be invested, over time, significant sums can be accumulated in a lifetime tax shelter.
Various different asset classes, such as cash deposits, fixed interest securities (such as government bonds), UK and overseas stocks & shares. as well as more esoteric investments such as shares listed on the Alternative Investment Market (AIM) and peer to peer financing, provide a wide range of different types of investments to suit many different objectives and attitudes to risk.
The main features of the different asset classes are set out below.
Cash ISAs allow individuals to invest sums up to the maximum allowable limits (see below) into variable or fixed rate savings accounts, where all interest will be free of taxation for the lifetime of the ISA.
One of the main features of a cash ISA is that the capital value will be secure, provided total investments with any one financial institution do not exceed the deposit protection limits provided by the UK Financial Services Compensation Scheme (FSCS), which is currently £85,000 per person per institution.
Although cash ISAs are secure, in the current low interest rate environment, the levels of interest payable are correspondingly low, however, cash ISAs do provide a secure home for individuals who do not wish to have any risk of capital losses from their investments.
It should, however, be borne in mind, that the value of the capital and any interest earned, will be at risk to the effects of inflation, which will reduce the purchasing power over time.
Stocks & Shares ISAs
Despite the name, stocks & shares ISAs can invest in a variety of different asset classes, including fixed interest securities (government and corporate bonds), property, as well as UK and overseas stocks & shares (including higher risk shares such as those listed on the AIM) so that individuals can design an investment strategy to meet their own requirements and risk profile.
Fixed Interest Securities
These investments are generally loans to government or individual companies and barring default, the loan is repaid in full, along with interest over an agreed term. These investments can generally be traded in the market, however, if they are sold before the contractual repayment date, the value will fluctuate depending on things such as market interest rates, the outlook for inflation and the term to contractual redemption.
This asset class will typically invest in commercial property such as office buildings, warehouses, retail outlets, shopping centres, etc. Returns from property funds tend to be made up of ongoing rental income, as well as capital appreciation over the longer term.
However, there are risks such as void periods, failure of any tenants, as well as general risks associated with property prices in general.
An additional consideration with property type investments is that, given the nature of property sales, it can take some time if properties are to be bought or sold. As such, investors may have to wait before they can withdraw their funds, as many funds reserve the right to suspend withdrawals should too many investors be looking to redeem their holdings at the same time.
Shares are investments into companies situated in the UK and overseas. Owning shares entitle the investor to participate in the fortunes of the individual company into which they invest. Many can be household names such as Tesco, National Grid, HSBC, BP, etc., although many shares can be much smaller and unfamiliar companies, especially if investing in emerging markets and/or AIM.
Shares provide the opportunity for capital appreciation and in many cases, ongoing dividend payments over the longer term. They, therefore, have the potential to provide higher returns than those available from safer assets, such as cash deposits and fixed interest securities. However, shares can also be extremely volatile with significant fluctuations in capital values and therefore, the potential for capital losses, particularly in the short term.
Investors in stocks & shares ISAs can diversify between the various asset classes so as to reduce risks and create an investment portfolio in line with their own objectives.
Junior ISAs (JISA)
Junior ISAs are available to children under the age of 18 and can be invested in all of the same asset classes as for a normal ISA (cash, stocks & shares etc.). Junior ISAs will need to opened by a parent/guardian of the children, however, the funds belong to the child, although they will not be able to access the funds until they are 18.
The ISA limits have increased significantly over the years and for the 2017/18 tax year, the limits are £20,000 per person. For Junior ISAs, the limits are £4,128 per child. The investment can be split between cash and stocks & shares ISAs and it is possible to transfer between cash and stocks & shares at any time.
In summary, tax efficient savings are gradually being eroded and individuals should consider building up a long term savings/investment portfolio within the lifetime tax shelter of an ISA. This can help to provide tax efficient income and/or capital withdrawals to fund future capital requirements or to supplement income before or after retirement.
Individuals should consider their objectives, time horizons, attitude to risk and their capacity to accept losses when establishing a suitable investment strategy.