J.P. Morgan Asset Management reveals 2012 ISA trends
In the first two months of the year, ISA inflows to the platform from those aged 61 or over outstripped inflows from all other age groups put together. Yet with many in this age bracket likely to be retired, and with extra personal allowances on offer for the over-65s (at least for the next year), their income tax liability is likely to be lower than for those aged 60 or below.
Latest available figures from HM Revenue & Customs show the highest concentrations of taxpayers are between the ages of 25 and 54. This ‘working age’ population is also likely to include a greater number of higher-rate taxpayers (including those on the top rate of tax), who would benefit most from the ability of ISAs to pay out dividend income without additional liability to tax, and to pay out interest income and capital gains completely free of tax.
Dividends are paid out net of 10% tax, and basic-rate taxpayers have no further tax to pay. A higher-rate (40%) taxpayer who held shares outside an ISA would have to pay a total of 32.5% tax on dividends (42.5% for top-rate taxpayers), meaning they would lose an extra 25% (36.1%) of the dividend they receive. Investors must declare and pay this via their self-assessment tax return – another burden that is removed for ISA investors, who have no further tax to pay regardless of their marginal income tax rate.
Similarly, capital gains – if the amount realised exceeds £10,600 in a tax year – are taxed more heavily for higher-rate taxpayers, at 28% compared with 18% for basic-rate taxpayers, meaning the tax-free nature of capital gains within an ISA is worth more to those on higher incomes – who are more likely to be those of working age.
As today’s working population is likely to have to work longer and pay more towards supporting themselves in retirement, use of the ISA tax breaks could form a useful plank in their overall financial planning strategy.
Keith Evins, head of UK marketing at J.P. Morgan Asset Management, said: “While it may be unsurprising that older investors have the greatest amount of assets in ISAs – after all, they have had more time to build them up – those in the working population could build up significant tax advantages over time by making better use of the ISA tax shelter.
“By using ISAs, where returns are tax-favoured, alongside pensions, where tax relief is available on the way in, investors can build a diversified portfolio with maximum flexibility as well as tax breaks. J.P. Morgan WealthManager+ accepts ISA investments from £50 a month right up to the full annual allowance, and with a choice of more than 800 OEICs and investment trusts from over 30 management groups, there really should be something available to suit most investment strategies and risk appetites.”