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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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Comments
David Norman says:
4 May 2011

Bonkers,

ISAs are a real success story because of their simplicity – and should be left well alone.

Simplicity also means low charges – no places to hide fees!

The only real way to make savings grow is to make initiatives like NEST compulsory and to gradually increase the contributon rate over time.

The other thing that needs to happen is a complete overhaul and simplfication of the pensions regime in the UK. There are so many rules, schemes, products, allowances it is impossible to make any decisions with confidence.

The new flat rate state pension is a good start – the next step is to sweep away the legacy (s226, AVC, CIMP COMP, APP, stakeholder, SIPP, SSAS, USP, DC, pre 86, GMP etc etc) and replace the lot with a simple pension product – a pension ISA with basic rate relief only.

LMW says:
4 May 2011

When will these Think Tank people get the message that people with low incomes cannot afford to save in the current financial climate. It will not matter what they dream up and what name they call it.
ISAs have now been accepted by the majority of people who have an interest in saving so why change something that is working well

sarahscraps says:
4 May 2011

isa’s are a good idea if you have the means to save and it’s nice to think the government are not going to get their hands on any more or your money by taxing it as well as your wages !!

ISAs have been another money spinner for banks, higher margins than ordinary savings accounts, more lock-ins to low rates after a one year come on. Hardly anyone advertises rates that are consistently competitive. The financial press (including Which? – shame! on you!) aid and abets by selecting at best buys on the basis of introductory rates often with ridiculously high bonuses.

It’s hardly surprising that people earning less than £200 per week are unlikely to have an ISA. They would need to be living in their parents’ house or a monastry to save on that wage!!

Mal says:
4 May 2011

ISA’s (any savings) are only any good if the interest you get beats inflation, at the moment there are very few products, if any that actually do that. To get anything like you need to go for a long term fix and risk missing out if rates improve or earning no interest if you need the money in an emergancy and have to close the account.

It’s all a scam!

Henry says:
4 May 2011

Mal is absolutely right – it is a bloody scam. Isas or its predecessor the Pep used to make sense because it was truly tax free – not even dividend tax was payable (or was it recoverable). Then along came Gordon, the highest taxing chancellor the country has ever had, and taxed everything, including pension investments, in sight. That is probably why all investments we have today don’t make sense. He also let the isa managers run away with their charges, consequently whether your Isa is doing well or not the manager gets his pound. sometime the pound is so big that the Isa goes into a loss because of his cut. What’s more every time you move inside an isa the manager makes another pound – he can not lose! Not to mention the recent headlines about Isas generally paying **** interest rates.

Ad Refusnik says:
4 May 2011

There’a no point bemoaning the fact that low earners don’t save enough – through ISAs or any other way… If you’ve no spare cash there isn’t anything to save.
ISAs are one of the few tax-free perks for those who aren’t in a position to take advantage of the gravy train available to the highly paid.
The rules also give an incentive to leave the money alone in the medium term rather than raiding it for short term use (Xmas, holidays…).

Sue Thomas says:
5 May 2011

The interest paid on Cash ISAs is lower than that paid on other savings account thereby nullifying the tax advantage.

CJH says:
5 May 2011

The general opinion is right, if you have money to save, you will, if not you can’t. I disagree that Cash ISA rates are lower than standard savings rates…its the marketplace. I shopped around, I didn’t want to lock it away, and wasn’t interested in any promotional rates where the rate drops later. I currently get 3.25% making 4.06% gross. There are not many standard savings accounts, with instant access from a reputable company that compares…….I know that someone will now point one out. Bottom line is I save what I can and get a rate I am happy with. There are ISA’s out there with min investment £1. If low earners do not use these then they will not use any alternatives. One thing that is not clear is £1 for every £10 in first £1000, £1 for every £20 in next £1000, £1 for every £30 in next £1000…..after that is it £1 in every £40, then £1 in every £50 and so on or is the £1 in every £30 the minimum rate you can earn? If £1 in £30 is the minimum then I will guess that ongoing most people will be better off irrespective of their investment. I use mine as a long term investment, my wife uses hers as a savings account….she is never likely to achieve the maximum £5340, so she puts in what she can and draws out when she needs it… Regarding ISA’s being replaced…I cannot see it making any difference to low earners, I cannot see it making much difference to those more prosperous. It works in its current format, which is probably a good enough reason for the Government to want change!

Barry Crossland says:
5 May 2011

The reason why people on low income do not save is that they are struggling to survive and there is no need for statistics. ISAs result in tax relief to the more affluent tax payer. However, in real terms inflation results in savers losing money in many cases, even after tax relief.

In fact cash ISAs do bot help savers because the interest rates are below the inflation rate so every one with a cash ISA is seeing their savings diminish in real terms. One is warned that Stocks and Shares ISAs can also loose you money but if you invest through one of the Fund “supermarkets” and select a variety of Funds from their suggested portfolios on balance you are much more likely to beat inflation and enhance your savings. I can get a daliy report from the one which I deal with (Fund Choice) and can buy or swap Funds at a very economical rate. I expect make at least 10% this year and hopefuly more.

Bill Hall

where are the thirty nine steps

They have their points – a bonanza for the banks (great for cash flow), interest rates – disregarding bonuses – barely (if at all) cover the savings in tax, and there is the long term incentive of investing every year. If there is a cxapital gins tax relief on certain types of ISA, then this benefits those who have a large quantity. Al in all, why would the government wish to abolish them.?

to start with i haven’t had a wage rise that even matched inflation for the last five years so i’m already poorer than when i first took out an ISA. I earn below the national average but am still able to save a little but seeing the interest i get every year, even tax free its a paltry amount and makes premium bonds seem a little more attractive. i know the chances of winning a decent wedge are minimal but its a little ray of hope and unlike the lottery the money is still there if you need it on a rainy day, allowing for inflation of course.

PR says:
6 May 2011

ISAs are useful as they allow a lot of people to save something – cash or stocks-n-shares. I would like to see the Annual cap lifted so people could save more if they have more.

Peter Lorton says:
6 May 2011

Does the “Think Tank” have any evidence,or is itjust a theory. THe gtreatest deterent to National Savings is surely the poor return.

Michael Fox says:
6 May 2011

Should political thinktanks be scrapped?

strebe-grebling says:
6 May 2011

Some people choose not to save, but others prefer to look after themselves, thus saving the state substantial amounts in welfare payments. So, any method to encourage the latter is worthwhile for the government.

It’s not surprising that a left-wing think-tank wants as many people as possible to depend on the state, but scrapping ISAs is a crazy idea and should be resisted.