Above all the noise in the UK Government budget about pension changes, you may have missed the changes relating to Individual Savings Accounts, or ISA’s:
ISA’s will be renamed NISA’s (‘New ISA’s’)
From July 2014, the annual limit on (N)ISA contributions will increase to £15,000
There will no longer be restrictions on how this must be split between cash and equities / bonds
You will, for the first time, be able to move money from a ‘stocks and shares’ ISA into a cash NISA
That last point opens up an interesting arbitrage for some people, including myself and my wife. Every year, we use our cash ISA allowance to the maximum. We do not use the ‘stocks and shares’ part of our annual allowance because we have / had jobs which are City based – we already have enough of our future tied up in the well-being of the stock market!
However, I AM now going to open a ‘stocks and shares’ ISA in the current tax year, to use up my £5,760 allowance. Why? Because, after July, I can close it down, liquidate the assets and turn it into a cash NISA! Effectively, going this route allows me to sneakily double my investment in a cash ISA for the 2013/14 tax year.
But which ‘stocks and shares’ ISA to pick?
There are two ways to invest. You can either invest a lump sum of £1,000, or make a £75 monthly investment for at least six months. In either case, you must leave the account open for six months.
You hopefully don´t need me to remind you that this is an investment product and you could lose some of your capital – these miles are definitely not risk free!
The less risky option is £75 x 6 months = £450 invested. If you valued the miles at £50, you would still come out on top with a 10% fall in the market by the time you exit.
The £1,000 lump sum investment is clearly riskier – the value of the miles is wiped out with just a 5% fall in the market. As your entire £1,000 is invested on Day 1, you are also losing out on proportionately more bank interest as well.
You cannot open this ISA if you already have a ‘stocks and shares’ ISA for the current tax year. You can open one if you only have a ‘cash’ ISA for the current tax year. The small print says that the offer is once per customer, although I know people who have opened one of these in earlier tax years and got the miles a second time.
This is certainly not one for totally unsophisticated investors. However, if you don´t need the money back in the short term then you do at least have the flexibility to sit it out until the market gets back to your original investment level!
My plan is to open a Virgin Money ISA with my full remaining ‘stocks and shares’ allowance of £5,760 for the current tax year, and then close it down – transferring the proceeds to a cash ISA (by then they will be called NISA’s) – in exactly six months time. If for some reason it is ‘out of the money’ at that point, I will simply let it run until it gets back to the original level.
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