On 27th October a new ISA limit came into force for the over 50’s which allows you to invest up to £10,200 in a tax efficient ISA. In booming markets this gives baby boomers the chance to cash in before the new limit is rolled out to all investors in April 2010.

How does the new allowance work?
ISA’s come in many shapes and sizes; there are cash deposit based accounts or those that invest in a myriad of different assets including stocks and shares, corporate bonds, government debt and property.

You are currently free to invest up to £7200 pa across both ISA types which includes a maximum £3600 in cash but with the new annual subscription limit, over 50’s will soon be able to invest £5,100 in cash and up to £10,200 overall.

Clients need to be aware that you are allowed to open only one cash ISA and one stocks and shares ISA each tax year so if you haven’t already opened one then you can invest up to the new limit. If you have an existing ISA then you may need to take care not to disrupt your existing investment. Some cash ISA providers limit the amount that you can invest in your ISA in a given period of time and if you have already reached that limit then they may not now allow you to take advantage of the new allowance. Some institutions may also decide not to allow their investors the opportunity to benefit from the increased allowance at all but if either scenario applies to you all is not lost.

It is possible to transfer your ISA to another provider to take advantage of the increase, but it is vital that you do not simply close your existing ISA account to open another. Simply closing an existing account without formally transferring your balance in the old ISA will mean that the existing funds are looked on as new money and reinvestment will be counted against your allowance for this year.

This means that if, for example, you have built up a substantial savings pot in your exiting cash ISA of what could be as much as £30,000 and then close this account trying to re-invest in a new cash ISA, you will only be able to receive the tax benefits on £5100 of this money. Instead, you must transfer the balance using an ISA transfer form so that any pre-existing investment remains protected by the tax wrapper.

It is also important to check the terms and conditions that your ISA provider is offering on investment up to the new limit. It may be that a different rate or charges apply to investments over the existing limit of £7,200 and up to the new £10,200 limit and you should be especially wary of this if you have a fixed rate ISA.

How can I best take advantage of the increased allowance?
It’s all about risk versus reward. The cash ISA option carries less risk than a stocks and shares ISA but interest rates on deposits are currently low whilst equities have bounced back very strongly of late.

If you are tempted to invest in stocks and shares but you are put off by the risk then you could consider drip feeding money into your ISA to spread the risk. This is advisable for any form of investment but is especially useful for Stocks and Shares ISA savers as it allows you to minimise the effects of short term fluctuations in the stock market.

The advisers at RedegoFinancials can help you to maximise your investment potential by advising you on the best ISA for your needs. If you decide to opt for a stocks and shares ISA then our adviser will recommend a suitable spread of stocks and shares to suit your attitude to risk and they are on hand to help you transfer your ISA if your current provider won’t allow you to take advantage of the new limit.

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