Here’s how to build your very own ISA tax haven 

Former Conservative MP John Lee is one of the most enthusiastic investors I’ve ever had the privilege of meeting. 

Now a Liberal Democrat life peer with the rather grand title of Baron Lee of Trafford, the 78-year-old remains as passionate about investing as he has ever done – and he has considerable investment clout.

In recent weeks, he has been vociferous in his criticism of the lack of information given to shareholders by companies which receive takeover approaches from rivals.

His concern, that some shareholders can lose out as a result, has prompted the Takeover Panel to promise to review its oversight of bids to see whether information should be made public.

While an Isas main purpose is wealth creation they can also be used to help build a deposit for a first home

Yet it’s Lee’s longstanding love of Individual Savings Accounts that stands him apart from the madding investment crowds.

Eighteen years ago, he was identified as the country’s first Isa/Pep millionaire, and he has been a flag-waver for tax-friendly Isas ever since (Personal Equity Plans were their precursor).

Over many a lunch (meat and two veg) at the Houses of Parliament, he’s told me how marvellous these legal tax havens are, rarely drawing breath to consume a sliver of the food before him.

Although the lunches have been on hold for a while, Lee has lost none of his enthusiasm for the Isa.

‘In my view, Isas are the most outstanding investment wrapper in the western world,’ he told me last week, after I contacted him to say that I was compiling a special report on them.

‘They’re a great opportunity for investors that shouldn’t be missed.’

For the record, he remains an Isa millionaire, although he is coy over how much he has squirrelled away in his own tax haven – other than to say that his plan’s value ‘has travelled nicely northwards ever since 2003’.

Lee, author of a couple of splendid books on investing (How to Make A Million – Slowly, and Yummi Yoghurt, aimed at youngsters), is absolutely right about Isas. 

They remain one of the best ways for adults – and for that matter children – to build long-term wealth that cannot be touched by the taxman. Yes, our very own tax havens.

As Jessica Ayres, a chartered financial planner with London-based financial adviser Timothy James & Partners, says: ‘Isas are irresistible – they’re flexible, tax efficient and simple.’ In other words – who wouldn’t want one?

Ayres also says that Isas provide future retirees with a chance to complement their retirement finances with tax-free income – a holy grail for the retired, given that income from work and State pensions is taxable. 

So, a tax haven with the prospect of tax-free income on top. Welcome to the wonderful world of Isas.

In this brilliant report, we explain how you can use the simplicity and tax-freedom of Isas – lauded by the likes of Lee and Ayres – to help build your long-term wealth and start putting in place your retirement finances (however young you now may be).

Look upon Isas as wealth building blocks that can be employed at any age – even children can get a slice of the Isa action – and while their main purpose is wealth creation they can also be used to help build a deposit for a first home. 

So what are the Isa basics and why should you start building – or continue to build – your own tax haven?

Experts say to look upon Isas as wealth building blocks that can be employed at any age

Experts say to look upon Isas as wealth building blocks that can be employed at any age

ISAS IN A NUTSHELL

Don’t be intimidated by all the jargon – the curse of the financial world. Just look upon Isas as tax-friendly wrappers. 

Whatever goes inside this wrapper becomes a tax-free investment or savings account – and whatever it then generates by way of income and capital gains is tax-free.

The rules, as Ayres says, are ‘simple’. Anyone over the age of 18 can pay a maximum £20,000 per tax year (April 6 to April 5 the following year) into an Isa.

The Isa can be cash-based, with accounts typically offered by a bank or building society. All interest accumulating inside the cash Isa is tax-free. 

Cash Isas are perfect for people who wish to build a financial war chest or who do not want to take any risks with their savings even if the interest on offer is borderline paltry.

Or, more excitingly in terms of wealth creation, the tax wrapper can be used to house investments. 

Such Isas, often referred to as stocks and shares plans, are offered by a number of big online providers such as AJ Bell, Fidelity, Halifax, Hargreaves Lansdown, Interactive Investor, Nutmeg and Wealthify.

Typically, investors can use the wrappers to buy UK shares, investment funds, stock market listed investment trusts or portfolios designed to meet their attitude to risk (cautious through to adventurous). 

Adults can contribute to both a cash Isa and an investment Isa in the same tax year. The only proviso is that they do not exceed the annual contribution limit of £20,000.

Those aged 18 to 39 can also use part of this allowance to take out a lifetime Isa – an Isa designed primarily for people wishing to buy a first home, although it can also be used for retirement funds.

These Isas have a juicy twist in the shape of an annual cash bonus from the Government worth £1,000 a year on a maximum annual permitted contribution of £4,000. 

But this bonus means there are nasty penalties for those who need to access their Isa for any reason other than for a home deposit or for retirement purposes at age 60.

Last, but not least, Isas can be taken out on behalf of children. Here, the maximum annual contribution is £9,000 and, as with adult Isas, the plans (called Junior Isas) can be either cash or investment based.

One quirk in the Isa system that is often overlooked is that children who are aged 16 or 17 can contribute (with help from their parents of course) to both a cash Isa (maximum annual contribution of £20,000) and a Junior Isa in the same tax year. 

So, potentially a chance to shuffle £29,000 into a tax haven that they will be able to access from age 18.

Easy: Anyone over the age of 18 can pay a maximum £20,000 per tax year into an Isa

Easy: Anyone over the age of 18 can pay a maximum £20,000 per tax year into an Isa

WHY THEY’RE A SAVER’S DREAM

What I – and for that matter Jessica Ayres – love about Isas more than anything else is their flexibility. Compared with pensions, where complexity rules the roost, Isas are a saver’s and investor’s dream. Manna from heaven.

This means you can usually save or invest in dribs and drabs – turning off the contribution tap when times are tough and then turning it back on again when you’re feeling flush.

And, as already mentioned, if you go down the investment Isa route, you have a plethora of choices over what to invest in.

You can also transfer your Isa to a new provider if you don’t think your existing one is delivering value for money. And there is nothing to stop you transferring the proceeds of a cash Isa into an investment Isa – tempting at a time of low interest rates.

At the other end of the spectrum, you can access your money when you want. In contrast to private pensions, you don’t have to wait until age 55 or 57 (lifetime Isa excepted) before you can access your money.

You can withdraw sums when needs must – although of course Isas work best of all if they are left to grow for as long as possible. Equally as important, there are no tax penalties on Isa success, as John Lee will gleefully tell you. 

This contrasts with pensions, where funds above a lifetime allowance of £1,073,100 attract a tax charge of up to 55 per cent. In the Budget earlier this month, the Chancellor froze this allowance for the next five years until April 5, 2026.

Most experts believe that where possible savers should embrace both pensions and Isas

Most experts believe that where possible savers should embrace both pensions and Isas

PENSIONS OR ISAS?

This brings us nicely on to the debate about Isas versus pensions. When push comes to shove, which of the savings vehicle should we prioritise?

Contributing to a pension is a no-brainer, especially if you are employed and your company is making additional payments into your pension on top of those you make (a requirement under auto-enrolment rules).

Any contributions you make also attract tax relief, which means that for a basic rate taxpayer every £1 paid in becomes £1.25.

On the surface, Isas appear less attractive, because contributions attract no tax relief boost (you make contributions from your taxed income).

But most experts believe that where possible savers should embrace both pensions and Isas, because the latter really come into their own in retirement.

It is a point expertly made by Ayres. She says: ‘The Government, aware of the retirement funding gap, has continued to encourage investors to contribute to their pensions with attractive tax reliefs.

‘Yet few investors consider that they will be taxed on their retirement income, especially once their taxable state pension kicks in.

‘This is where the Isa comes into its own. It’s a perfect complementary investment which provides tax-free income in retirement.’

So, dear readers, embrace Isas heartily. You never know. One day, you might join John Lee in the Isa millionaire club.

A guide to assist those looking to ensure their finances are prepared for the journey into retirement has been put together by The Mail on Sunday. It looks at the role that Isas can play in this.

Called ‘The complete guide to financial planning for those approaching or already in retirement’, it is available by phoning 020 7030 3335 or via dailymail.co.uk/sjp. It has been written in partnership with St. James’s Place Wealth Management.

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