Higher ISA allowances work
Looking at the latest ISA sales figures from the Investment Management Association (IMA), it is easy to conclude that the higher allowances introduced last October have done the trick.
From 6th October 2009, investors over age 50 by the end of the 2009/10 tax year saw their ISA allowance increase from £7,200 to £10,200.
The rest of us also received the new higher £10,200 ISA allowance from the start of the 2010/11 tax year on 6th April 2010.
Up to half of this allowance (£5,100) can go into a cash ISA. The balance of unused allowance, up to £10,200, can go into an investment ISA.
With historically low interest rates and very few attractive cash ISA deals out there, it is little surprise that investors have been favouring the investment ISA option.
ISA inflows have averaged over £400 million a month net since October last year. This is more than double than the inflows seen during the same period a year before. They also increased in April when the annual ISA allowance went up for everyone.
Higher tax-efficient investment allowances encourage more people to invest for the future. Who would have thought!
Perhaps most telling was the response to research carried out by the IMA, suggesting that 47% of ISA investors would invest more if the ISA allowances were raised further.
The ISA allowance will increase in line with the Retail Prices Index (RPI) in April 2011. The increase will be a round number, easily divisible by 120, so the effective monthly limit does not become too complicated.
All eyes will be on the publication of RPI inflation figures for September 2010, as this is the number used for the ISA allowance increase in April. In fact, the September RPI figure is used for a variety of increases to allowances and benefits.
RPI annual inflation for the year to August 2010 was down slightly, at 4.7% compared to 4.8% the previous month.
Assuming the September figure is the same as August, we could see the ISA allowance for 2011/12 increase from £10,200 to £10,679.40 and then rounded up to £10,680 or £890 per month.
A £480 increase in the ISA allowance next tax year will certainly be welcomed by investors and should encourage even higher investment levels next year.
Whilst the government is preparing to announce details of their spending cuts, we feel it is unlikely that ISA allowances will be targeted. The cost of tax exempt investment returns within an ISA is relatively low, as evidenced by the cost of increasing the limits recently by £3,000.
This coalition government wants to encourage individuals to make provision for their futures. Boosting the ISA allowance each year in line with inflation is a good way to achieve this.
Photo courtesy of Philippe Put.