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NISAs – The new combined ISA

NISAs were one of the big announcements in the 2014 budget, but what are they exactly, how do they differ from ISAs and savings accounts, and are they suitable for you?

Life is NISA

NISAs are the new form of ISAs, a tax-free savings account that does away with the differences between old ISAs and expands the limit.

ISAs, which are currently held by roughly 24 million people across the UK, were overhauled in 2014.

The previous distinctions between cash and stocks and shares ISAs were combined into a new ISA – NISA – with a limit of £15,240.

That £15,240 can be sheltered from the tax authorities in cash savings, stocks and shares, or any combination of the two. That’s up from the old limits of £5,670 for cash ISAs, and the same amount in stocks and shares.

That sounds great in theory, but with savings rates remaining at rock bottom the chances that this means a huge boost in your savings is remote.

How NISAs differ from ISAs

The old ISA limits separated the savings limit between cash and stocks and shares. This was fine for those of us willing to invest in stocks, but it penalised cash savers.

Under the new rules you can transfer your old stocks and shares ISAs into cash, or simply put the full £15,240 into cash or stocks. To transfer from a stock and shares ISA to cash you simply need to ask your ISA provider who should be able to do this for you.

This means that for anyone with savings, the amount you can lock away each year has increased drastically. As with any savings, the more you have, the more you will benefit from these changes, which allow you to protect a greater amount from the tax man.

Low interest, what’s the point?

Regardless of whether interest rates are high or low taking out a NISA and topping up you limit each year is almost always the right choice.

Any interest you receive outside of a NISA will be taxed, so any cash benefit you receive needs to exceed the interest rate plus tax. For higher rate tax payers paying 40%, this requires a substantial return on their investments.

It’s also worth bearing in mind that interest rates change, and from 2014 with rates at rock bottom levels they are likely to go up.

However, the amount you can put into your NISA is limited at £15,000 per tax year.

That means that if you waited three years for rates to improve you could only put £15,000 in, whereas if you transferred in now you’d have £45,000 earning interest tax free. The annual limit makes NISA investments something you need to think about for the future, as well as the present.

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Alternatives to NISAs

While a NISA offers the single biggest tax-free savings resource for UK savers there are a huge variety of other options for savings, ranging from investments, regular savings accounts and current accounts, to bonds and NS&I savings.

The most common alternative to NISAs are regular savings accounts which come in a variety of shapes and sizes depending on how long you’re willing to lock your money away for.

A regular, or easy-access saving account, will allow you to put in and take out money whenever you please, but will offer a lower rate of interest in return. Long-term savings account of up to 5 years lock your money away out of reach, but do offer high interest rates in return.

When comparing savings rates to NISAs though bear in mind that any interest you receive will be subject to tax.

Investments are a far riskier proposition as you are by no means guaranteed any return and you could lose money. However, they do tend to offer far higher potential financial reward than savings accounts.

NISAs offer a tax-free way to invest with stocks and shares NISAs. These operate like any other investment, but the NISA acts as a tax-free wrapper, so you won’t be charged on profit made by the first £15,000.

Tax-free alternatives to NISAs

National Savings and Investment, or NS&I, bonds and savings accounts and child-trust funds are the only other tax-free alternative to NISAs. NS&I savings are the government’s very own savings accounts.

The main attraction of NS&I savings is the security of knowing that all of your savings are fully protected, but in addition, NS&I offer tax-free premium bonds, savings certificates, and children’s bonus bonds.

NS&I premium bonds are a unique way of saving. You can save up to £30,000 in a premium bond, but rather than receiving a regular form of interest on your savings, you are rather offered a place in a prize draw.

Each month everyone with a premium bond is entered into the lottery with prizes of up to £1 million, although the typical prize awarded is £50.

National Savings and Investment savings certificates meanwhile are similar to ordinary savings accounts but with one crucial exception: they are not widely available.

Rather, savings certificates are issued in batches. Both fixed and index-linked savings certificates are offered.

Finally child trust funds, NS&I children’s bonds, and junior ISAs all offer tax-free saving for children.

Child trust funds were issued between 2002 and 2011, although they are no longer available and have been replaced by Junior ISAs. Children’s bonds are the NS&I equivalent.

Both offer tax-free savings for children, but with restricted access. Junior ISAs allow £4,080 (in 2015/16) to be invested a year but they cannot be accessed until the child turns 18.

Children’s bonds meanwhile only go up to £3,000 per child, but can be accessed every five years.