Why the new combined Isa could mean a much better return on your money

There was lots of good news for MoneyWeek readers in the Budget. We were pleased with the new flexibility on pensions, and thrilled by the rise in the Isa allowance and the abolition of the (always slightly strange) wall between cash and stocks & shares Isas.

But this isn’t just good news because £15,000 is a really useful amount to be able to save in a tax free wrapper every year. It’s good news because it means that those of us who have always opened share Isas but held cash inside them (while waiting for the right time/investment opportunity) might finally get a return on that cash.

Say you have an Isa with Hargreaves Lansdown today. You are doing OK and you have a total of £200,000 in it. £160,000 is invested in various funds but £40,000 is waiting to be invested. You’ll be making 0.05% on it.

Worse, under current regulations for stocks & shares Isas you’ll be paying 20% tax on the income. So your annual return on the cash will be £16 (£20 in interest, minus £4 in tax). It isn’t much, but it is standard stuff and until now there hasn’t been much you can do about it – no one pays rates any higher on cash held in SIPPs and Isas, and you haven’t been able to transfer cash in and out as you like.

However, if everything now works as it looks like it is going to, this is all about to change. If you can transfer your money in and out of cash and shares you might just take that £40,000 and move it into a wrapper at, say, Nationwide where the instant access cash Isa currently pays 1.6%. That would give you a return of £644 (1.6%, no income tax).

It seems to us that even the threat of that happening is likely to get the brokers and fund supermarkets thinking they need to up their rates to a level that, even if it doesn’t match that offered by the banks, is at least high enough to stop us bothering to move (moving money around is boring).

Yet another thing to look forward to.

  • Cleverwithmoney

    “………no one pays rates any higher on cash held in SIPPs and Isas……..”. Not true! Hargreaves Lansdown’s rate IS one of the worst there is but Nucleus, for example, pays 0.5%. Still not a lot but better than a kick in the teeth. Of course, if you do the job properly and use an external SIPP deposit account you can get up to 1.4% for a £40k deposit if you’re prepared to give 35 day’s notice.

  • Merryn

    @cleverwithmoney.. fair enough. I should have said no one pays “much more” – the brokers/supermarkets all take a good margin on interest.

  • DrGrumpy

    I had noticed this advantage, but the important question is where will the transfer of cash from an existing stocks and shares ISA be allowed to go? Obviously this must be into the new NISA, but must it be the NISA you open in the current year (if so, does it count towards the £15000 limit), or can you transfer it to another NISA, in addition to the one you opened this year with the £15,000 in, as presently with cash ISA transfers? Anyone know?

  • Merryn

    @DrGrumpy. I’m assuming you’ll be able to move the lot around the place as you like (subject to whatever ludicrous charging system the brokers and banks invent) just as you can with stocks and shares ISAs now.