/ Money

Should Isas be scrapped?

Piggy bank in a clamp

A political think tank has proposed that Isas aren’t helping low earners save money and should be scrapped and replaced with something far less rewarding. So should time be called on Isas?

One thing that most people universally accept is that if you want somewhere to stick your savings, you should open up an Individual Savings Accounts (Isa). You know that you can contribute a certain amount every year and that by doing so, you’re sheltering your money from paying tax.

Isas are pretty straightforward to understand, too. There are cash Isas that allow you to save up to £5,340 a year and stocks and shares Isas in which you can invest up to £10,680.

It’s this simplicity that has made Isas so popular – around 20 million adults in the UK have one. That’s a whopping 41% of the adult population, and the figure keeps growing.

Which is why I think it’s a crazy, and potentially damaging, idea to scrap Isas altogether.

An adequate replacement for Isas?

The Institute for Public Policy Research (IPPR), a political think tank, has produced a paper saying that only high earners are benefitting from the tax relief that Isas offer and that low earners aren’t saving enough.

Some of its figures are pretty stark – 31% of families with a weekly income below £600 (£31,200 per year) have an Isa. This drops to 27% for families with a weekly income below £400 (£20,800), and 24% for those with a weekly income below £200.

So, what about a replacement then? The IPPR wants to scrap Isas altogether and start a new scheme called a Lifetime Bonus Savings Account.

In this, the Government pays you:

  • £1 for every £10 you save, up to the first £1,000
  • Then £1 on every £20 for the next £1,000 you save
  • And then £1 for every £30 you save on the next £1,000 you save.

Has anyone else gone cross-eyed trying to understand that? It’s a far cry from the clean and simple Isa already on offer.

Oh, and although the tax relief the Government gives to Isas costs just over £1.5bn, the new scheme is going to cost almost double to set up and pay for. I’m sure George Osborne can’t wait to get started on this one.

Educate, educate, educate

Fortunately, the Government has put its faith in Isas, firstly by committing to increase the maximum savings allowances every year by the rate of inflation (measured by the Retail Prices Index), then later in the year, it will launch Junior Isas, to help parents save for their children.

But how do you encourage lower earners to save more? I think the key is education. The last decade has been a bumper one for those that have simply saved cash in an Isa, with returns even outstripping what the UK stockmarket has paid out. But I don’t think enough people know just how beneficial these great little savings vehicles are.

The body that looks after Isas (the Tax Incentivised Savings Association, or TISA) should be singing the advantages from the rooftops, getting adverts on the TV and into the newspapers. Then, you may see more people with less to live on starting to engage a little more.

Key to this is communicating that there’s often only a minimum of £100 required to kick off your savings. Then, perhaps lower earners wouldn’t feel intimidated, or that they don’t have the capacity to save.

Should Isas be scrapped?

No (97%, 2,919 Votes)

Yes (3%, 102 Votes)

Total Voters: 3,020

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ISA’s may not be perfect but I think they are a good easy route to getting into the savings habit. People always like a way of not paying tax. I never wanted a Tessa – they seemed to tie you up too much.

Vera Hornby says:
16 May 2011

Isa’s are brilliant. I’ve had one for several years and have earned decent interest despite the ‘credit crunch’. I doubt I would have made as much interest elsewhere. Why give the tax man your money when you can keep it in your own pocket! You need to think ‘long term’ when saving with an Isa otherwise it can cost you. But surely the point of an Isa is to help to save or build up your savings so why would you want to withdraw what you’ve paid into it.

Michael says:
19 May 2011

I don’t agree with the think tank’s proposal. In the current economic climate low earners probably haven’t much money to save anyway, so why change things to the detriment of existing Isa savers. Isa’s are simple & tax efficient but they generally have to be actively monitored & managed in order to maximise savings.

At the moment ISAs offer poor rates – but so do most cash savings – Three years ago the interest rate was ‘reasonable’ – then came the Bank induced credit crunch – which meant I couldn’t afford to save. The result? After a year My bank suspended my cash ISA so I could not put money in or get money out!!!
Interest paid dropped to 0.2% though tax free.

A close examination showed that I am NOT limited to just one Cash ISA and one Stocks and Share ISA as my Benk had originally said – but to one active Cash ISA and one Stocks and Share ISA . So the suspended ISA no longer counts although still pays tax free interest. A new Cash ISA pays 2.5% – not much but 12 times the old account – sadly limited to only £5,300 pa. for one year .

In addition their Regular Saver now pays 8% a staggering 40 times higher than the old Cash ISA – though not tax free – and limited to £25 to £300 per month – a max of £3600 – But for those that can afford it – a good rate with no risk.

Sadly all savings schemes benefit the rich – not the poor – especially those living on the interest on savings – and who also need very low risk schemes. Which is typical of Conservative policies.

Why is it that the IFA seems to be making more than oneself ? When I transfer money from one CREDIT / DEBIT account to another why is their a gap of days yet other way round you are charged exhorbitantly for it ? Surely if banks were acting fairly they should be balancing credit & debit not use it for their own gain ??!! Could this be contributing to the credit crunch as if this appled to business they could go bankrupt?

John Halfpenny says:
18 April 2012

ISA’s should be abolished.
Anyone who can set aside up to £10000 (sometimes annually) should pay tax on the income.
If simplicity is required,exempt the first £5000 of cash investments for everyone. This would encourage saving.
Non-ISA savings are currently exempt from tax at source for non-taxpayers on completion of form R85. A similar certificate would suit this scheme.
Shares,with the complications of dividends and capital gains etc, should be excluded.

Steve Kendrick says:
19 April 2012

What an absurd suggestion! “scrapped and replaced with something far less rewarding”. I was once a low earner with a family to support. The Friendly Societies induced me to start saving; just £9 per month (now £25 tax free). Then the PEP came along and although I could never save the full annual amount, the tax-free status kept me saving as much as I could. For the last 2 years I have just managed to put away the full CASH ISA, nothing else. The issue of wealthy people enjoying this tax break can be addressed with higher tax rates, although perhaps not by this government given the £50,000 per annum tax break they have just given to £1m bonus earners and other ‘wealthy people’ pro-rata. Lower paid people not saving is due to them having barely enough to live on – been there – complex inducements won’t change the amount of surplus income they have available. Keep it simple – cash ISAs and Friendly Societies.