306% rise in Bed and ISA applications

The uptick at interactive investor suggests many are mindful of potential tax increases in the future.

• Bed & ISA instructions in January and February 2021 up 306% year-on-year.
• 35% of transfers into the interactive investor ISA came from cash ISAs in 2020, compared to 25% the year before.

From hand sanitisers to dumbbells, and men’s loungewear bottoms to women’s sweatshirts, the content of this year’s ‘inflation basket’ of goods revealed today by the Office For National Statistics illustrates the big changes to our shopping habits during the pandemic.

But it is not just our shopping baskets that have changed – attitudes and approaches to investments have evolved too, says interactive investor.

1. Bed & ISA instructions on interactive investor, the UK’s second largest direct-to-consumer investment platform, in the first two months of the year grew by 306% year-on-year.

In addition, while the pandemic has created a new wave of ‘accidental savers’, some 35% of transfers into the interactive investor ISA came from cash ISAs in 2020, compared to 25% the year before.

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “The stay-at-home message has seen many of us ditch formal attire for tracksuits and loungewear, spend more on workout equipment to channel our inner Joe Wicks and, when it comes to investments, many have become switched on. The hope is while our tastes, spending habits and spending power will continue to change, the focus on long-term financial security is here to stay.

“The year-on-year uptick in Bed & ISA instructions on interactive investor suggests many investors are switching on to potential tax increases in the future. While the chancellor froze CGT until 2026; maximising your ISA, even if you don’t have new money to invest, but have money held outside an ISA, remains cogent.”

Becky O’Connor, Head of Pensions and Savings at interactive investor, says: “In January and February, many people would have been mindful of potential tax changes – not just in the Budget, but down the line.

“The chancellor has recently made millions more people liable for income tax and other tax charges in one fell swoop by simply freezing allowances and thresholds. With inflation, including wage rises and now seemingly inevitable house price inflation following recent support measures for mortgages, this means more people will become the unwitting victims of ‘fiscal drag’ over the next few years.

“If you don’t want to see your hard-earned cash eroded by fiscal drag, as a result of this big freeze, there are some things you can do. A ‘Bed & ISA’ transfer is one of the tools some investors may want to use – it involves moving investment holdings that could potentially be liable to Capital Gains Tax in the future into an ISA wrapper, where any future gains will be free of Capital Gains Tax. Clearly this has been a key trend with interactive investor customers in the first two months of the year.”

Myron Jobson continues: “It certainly seems like many people had more time for financial admin over the last year and were able to finally get investing to the top of their to-do list - some 25% of our new customers in Q4 2020 are under 35.

“In a low interest rate environment, investors are increasingly looking to investments. Long term this is encouraging – taking too little risk can mean that you won’t achieve your goals, just as taking too much risk can be harmful to your long-term wealth.

“With society on the cusp of reopening, it is not a bad time to reassess your spending instead of reverting to all your pre-coronavirus habits. The lockdown period may have made you realise that you are a more frivolous spender than you think. It is worth considering whether some of that money could be put to better use – towards a rainy-day pot, deposit for a house, or extra investment.”

Becky O’Connor’s tips on how to reduce your tax bill in the land of the big allowance freeze.

1. Pay more into your pension to reduce your income tax bill. You can contribute up to £40,000 a year into your pension (or up to your annual earnings) and still get tax relief at your marginal rate. If you can tighten your belt and put more into your pension via salary sacrifice, this can be a good way of staying below certain thresholds that would trigger higher income tax charges, whether that’s £50,000 or £100,000.
2. Don’t forget carry forward. If you want to max out your pension annual allowance but did not do so for the previous three tax years, you can use the unused allowances from these years now. Great if you’ve had a windfall and you don’t need the money until you retire and would like to make it as tax efficient as possible.
3. Use ISAs as well as pensions for retirement saving. If you are well on your way to the Pension Lifetime Allowance limit of just over £1 million, don’t forget that ISAs are good for retirement saving too. They don’t come with tax relief on the way in, but you can take income from them free of tax and using them can minimise additional tax charges you would incur through going over your pension lifetime allowance. The annual ISA allowance is £20,000.
4. Use what’s called a ‘Bed & ISA’ transfer to move investment holdings that could potentially be liable to Capital Gains Tax in the future into an ISA wrapper, where any future gains will be free of Capital Gains Tax. However, interactive investor’s Bed and ISA deadline for the current tax year is 22 March (online applications), and some investment platforms have these transfers on hold this year.
5. Rising house prices, while never a given, will increase Inheritance Tax liabilities on estates over time, although private residence reliefs are in place. Investments in your pension that are left in your pension are not considered part of your estate for inheritance tax and so can be a good way to leave money to family.
6. Don’t forget your spouse’s allowances. You can pay into your partner’s pension as well as your own.
7. And don’t forget you can pay into Junior ISAs for children or grandchildren too. Thinking about your money as family money and making use of everyone’s allowances is a great way to do something to preserve your legacy today, rather than leaving it too late.