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UK investors may not have had much to cheer about this year but raising the investment limits on ISAs is at least some good news - especially for the over 50s.

This is because the new ISA rules (which come into force on October 6) initially only apply to those over 50 years of age – they apply to everyone from the start of the next tax year.

In case you aren’t aware the new full ISA allowance is now of ₤10,200 into stocks and shares (as opposed to the previous limit of £7,200). Alternatively, investors can put up to ₤5,100 in a cash ISA (compared to the previous cash limit of ₤3,600). There is still the freedom to mix and match cash and equities within the overall ISA investment limit.

Despite the rather bizarre decision to stagger its introduction to all UK savers, in general the changes are significant as raising ISA limits meaningfully is something that the industry has been demanding for over 10 years.

The increase in limit (₤3,000) is actually quite sizeable and more importantly keeps pace with inflation – something that in the past has been one of the criticisms levelled at ISA limits.

Good Timing

Given the poor returns on deposit accounts currently, it could be argued that the timing of the new ISA rules are ideal. Typically investors would flee to cash right now (particularly those closer to retirement age) but that is not really a viable option so they are having to look at other options. One of the added benefits of recent ISA changes is that not only can investors put more money each year in stocks and shares, they can also move money from a cash ISA into a stocks and shares ISA.

And if they make a transfer from a previous year’s ISA, it will not use any of the current year’s allowance. The bottom line is investors can move into stock and shares when they feel comfortable to do so without being penalised.

Neil Mumford, IFA with Milestone Wealth Management believes the new limits are good news for UK savers and investors and he explains why
"Under the new rules couples can now put over ₤20,000 a year into a tax-free wrapper. That is ₤100,000 sheltered from the tax man over just a five year period. I think people will be encouraged by the new limits and look to maximise their allowance where possible rather than just thinking about ISAs as a last minute thing each April."

He adds that the ability to transfer out of a cash ISA into a stocks and shares ISA is a change that has been welcomed too. “With cash rates on deposit so disappointing the ability to be able to move from a cash ISA paying low interest into corporate bonds paying better returns or into equity funds offering decent growth potential, has to be a good thing."

Keeping CGT in check

The new rule will be really welcomed by regular share investors who want to reduce their capital gains tax liability. Anyone forced to sell shares in order to purchase a big asset such as a house, risk crystallising all their gains in one tax year – which means that potentially they could be clobbered with a mammoth capital gains tax bill. Utilising the tax-free benefits of an ISA each year means that the CGT liability can be reduced or even avoided completely. This is where forward planning comes in- and it is especially relevant as there have been noises that the CGT rate might actually be raised in future years.

Where to Invest?

The new ISA limit means investors can invest an extra ₤3,000 a year into the stock market – the question is where? The answer very much depends on your risk profile – for instance if you are approaching retirement you should look to reduce risk and so avoid the high risk; high return investments such as emerging market funds or any aggressive, growth orientated equity funds.

The over 50s age group should be looking at low risk equity funds, possibly those in the cautious or balanced managed category and investment grade (i.e lower risk) corporate bond funds. The reason those in this age bracket should be scaling down on the risk levels is that their investment time horizons are significantly shorter than for those in their early 30s who can afford to invest more aggressively for the long term.

Anyone wanting to invest in a stocks and shares ISA but nervous of investing a lump sum in what could still be a volatile market (things have picked up since the FTSE lows of March 2009 but second guessing this market is a dangerous game) should consider a regular monthly savings option.

By drip feeding money into the ISA the investor benefits from what is called ‘pound cost averaging’ - by investing at regular intervals more shares are purchased when share prices are low and fewer shares are purchased when prices are high.