The New 2015 ISA Allowance And What It Means For Your Investments

Since the Individual Savings Account (ISA) was introduced in 1999 to replace the earlier Personal Equity Plan (PEP), the annual allowance has been lifted handsomely each year. And by the time the 2014-15 limit came into force in April last year, we were up to a very nice £15,000.

This year’s limit is only being raised in line with inflation, and that’s the way it’s likely to remain for the foreseeable future. So we’ll have a modest lift to £15,240 once the 2015-16 ISA season kicks in on 6 April, but being able to protect that amount of investment from tax is very welcome.

It’s simpler too

In 2014 many of the restrictions applying to ISAs were lifted, including the split between mini-ISAs and maxi-ISAs and the reduced limit that could be held in cash — and there really did seem to be little achieved by the complexities other than making it harder for people to understand and discouraging many from taking part.

You can invest the whole amount in a cash ISA now if you want, but I really don’t see why anyone would. With interest rates so low, even the very best ISA rate around is only likely to net you about £240 in interest over the year, and there are plenty of solid blue-chip shares that are currently delivering several times that in dividend cash alone.

A very achievable 5% dividend yield would provide £760 in cash in the coming year, and over the long term you’ll be able to look forward to rising share prices too — and you’ll do even better if you reinvest your dividend cash each year in new shares.

Treble your money?

As an example, in the 10 years to September 2014, National Grid would have turned an initial £10,000 investment into £20,400 on share price growth alone. Including dividends would have brought that up to £28,100 if you just left the cash sitting there — but reinvesting the cash would have left you with a very handsome £34,100!

There are some other forms of investments that can be held tax-free in an ISA too, including various funds like unit trusts, some insurance products and certain kinds of bonds. But with the possible exception of some good investment trusts (which can fit the Foolish philosophy well), most Fool followers won’t be interested in any of them.

That’s because buying shares in public companies has easily been the best form of investment available to ordinary investors for many decades, and that’s very unlikely to change in the future.

It’s easy, go do it!

All you need to do is open an ISA with a low-cost execution-only broker and transfer in your cash over the next 12 months, and then you’re free to invest in your own shares as you see fit — we’ve been giving you lots of suggestions for investment candidates over the past few weeks.

Once the cash is in, what's the best overall strategy for an ISA? There's a simple approach that can bring great tax-free long-term rewards.

To find out more, get yourself a copy of the Motley Fool's special 7 Simple Steps For Seeking Serious Wealth report, which shows you how investing in shares and reinvesting dividends has wiped the floor with every other form of investment over the past century and more.

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Alan Oscroft has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.