/ 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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Comments
David A says:
6 May 2011

No, Isas should definitely not be scrapped. It is true that cash ISAs offer poor returns at present (but still better than non-ISA cash deposits), but, if you are prepared to taker a bit of a risk with your investments, then stick it in a corporate bond fund (eg Fidelity MoneyBuilder) and get a tax-free rate of about 4.5% which can provide monthly income or get it re-invested in the fund, thereby building up your pot. With a bit more risk, you can build in some equity income schemes (eg Perpetual Monthly income ) and get a bit more capital growth (or income) to counteract inflation. This strategy has served us well over the last two years.

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

Your words. If this means that money already saved in an ISA wrapper, whether cash or equities, has to be taken out and put into a new account, then the whole thing stinks of bank profiteering, again. You don’t have to think very hard to see what a gift to the banks all of the holders of ISAs being forced to move their assets by a given date would be.

Who pays for this “think tank”, the banks?

Graham says:
6 May 2011

We need to get the Government out of the economy and meddling with people’s finances through taxation and ‘wealth redistribution’ (i.e. waste and destruction of wealth). This system, in the end, benefits those who have – even when the intention is ‘good’ there are usually unintended consequences. In this case, poorer people are supposed to benefit by having a tax free way to save, but its more the rich than the poor benefitting.

As nobel prize winning economist Milton Friedman might say if he were still alive, the more we get government out of the economy, the richer everyone would be, with the poor benefitting the most.

Julie B says:
6 May 2011

As far as I am concerned ISA’s are useless because your money is loosing value as it sits there, with the banking industry enjoying the fruits of my sweat. They need to be indexed linked at least.
Why scrimp save and suffer, just enjoy whist you have got it.

unixsystems says:
6 May 2011

Julie B, it would be nice if savings were index linked but your Government cooks the numbers so they don’t have to give the full cost of living raises to those on fixed incomes. It’s all digital money anyway, they can just create more and give us more inflation.

Isn’t it about time that the banks that the tax payer have a majority holding in, started behaving ecthically towards their customers, rather than seeing us as just their own little cash cow . I for one never bothered with ISAs cant be fussed with trying to stay one step ahead of the bank.

Moo.

Sorry for multiple posts, I think your hamster needs feeding, he’s not working hard enough

He seems to be a bit cranky this afternoon. I’ve thrown in some shredded newspaper and dandelion leaves, so hopefully he perks up!

P.S. I’ve also removed your multiple posts.

Fred Williams says:
6 May 2011

Why can’t we all run our own ISAs? No fees! ISAs are really a hidden subsidy to the Financial Industry. You can see this from the way they offer lower savings rates inside an ISA wrapper than outside. Running your own ISA would be like registering an account to have interest paid gross – an already established procedure.

They are okay for people on 40% or above tax but low earners can often get a better rate, after paying tax, elsewhere. It’s just got out of control and the bankers are allowed to pocket the tax rebate. Shocking really! They’ve been messed around with since Labour got into power because they don’t like anything with ‘tax exempt’ in the title, so TESSAs had to go. There is always a possibility of Labour introducing a low rate of taxation on them but the bankers have beaten them to it.

The interest rates are pathetic, so there is really little incentive to save in anything. But at least an ISA is straightforward to understand. The proposed replacement system seems to be far more complex and would probably do little to help savers.

ISAs are still a good idea for the reasonably affluent middle-aged. However in old age, particularly 80+, they will be less useful because on death they are subject to Inheritance Tax at up to 50%. Best then to give away generously, and as soon as possible, to your chosen beneficiaries from income on a regular basis “without reducing your standard of living” and/or as capital sums followed by your survival for seven years.

Andrew Hutchison says:
6 May 2011

I support the continuation of ISAs but would make two points:

1. It is scandalous that cash ISAs are paying such low rates. In effect, the lenders are creaming off the tax advantage intended for the saver.

2. If ISAs were to be scrapped what would happen to the substantial savings that many have accrued over the years in ISA accounts? Would the tax free state be preserved for existing savings, or not? It would be very unfair to existing savers to scrap the tax advantage, and very unfair to new savers to preserve it only for those already ISA invested.

Andrew

PP says:
6 May 2011

Prior to the credit crunch, most ISAS offered a decent rate. It has now become an obstacle course to find and maintain a decent rate. The government could influence ISA rates by introducing a new standard for the best ISAS, perhaps giving these a title such as “Gold standard ISA”. A target rate would be issued by the government, and would be updated from time to time. In order to qualify for the “Gold standard”, the provider must ensure that the ISA rate at the point of sale is no lower than the target rate. A guarantee must be given that the rate will not fall below the target rate that was published when the ISA was opened during the first 12 months. After 12 months the rate must be realigned with whatever the target rate at that time is for the following 12 months. Providers would also be required to allow at least one penalty free immediate withdrawal a year.

kenneth downs says:
6 May 2011

I do not support the removal of ISA’s BUT there is a case for a saving scheme that would help and/or encourager lower income savers.

The vest majority of people in this straw poll think that ISAs SHOULDN’T be scrapped – but I expect that the govt will go ahead and scrap them anyway!

Liam says:
6 May 2011

Scrapped! They are scrap already. One of mine has an interest rate of 0.25%.

Perhaps **** would be a better adjective

Michael says:
19 May 2011

Motivate yourself & transfer you existing Isa to another provider. It should be possible to find a provider offering more than 3% interest for twelve months.

Vast, even.

Graham Catchpole says:
6 May 2011

Interest rates on cash ISA’s are not good but adequate never the less . They are easy to understand so any replacement needs to be similar .It must not be complicated as the proposed alternative. Will anyone be able to work it out. No ,so they will not bother. Many of the population spend what they earn and more . That is how they live with past gouvernments doing precisely the same. This is not a good example. Sorry to change this philosophy we will need a major,major crisis with nobody including the gouvernment able to handle it.

Jon Eccles says:
6 May 2011

The problem with ISAs is not the concept, but the fact that banks take part of the tax saving by paying lower rates on cash ISAs than on other deposit accounts, and Fund Managers do likewise by charging higher management fees on the pretext of “managing” the ISA envelope. There is no justification for banks to pay lower rates for ISAs than on comparable accounts, nor for funds managers/agents to charge more for them – the procedures are not too complicated and well-known to them – they only use more junior staff to do the compliance anyway. These problems could be remedied simply by regulation/legislation.

csreader says:
6 May 2011

The IPPR’s argument that not enough people on lower incomes are saving in ISAs is very weak. The basic reason why they are not saving is simply that they have no spare income to save, as several people have already pointed out.

On a side issue: Energetic is wrong to say “on death [people] are subject to Inheritance Tax at up to 50%”. Inheritance Tax is a flat 40% on everything above the threshold, which is £325,000 (and possibly higher if you’re the second of a couple to die). In any case, there are several ways to reduce the liability to Inheritance Tax – e.g. giving to charity – that don’t require an expensive tax consultant.

John says:
6 May 2011

When you think of the tax that has been “avoided” over the years through TESSA’s and ISA’s,often at 40%, it is clear that,if they are not scrapped,there should,at least, be a cap on the total saved.
Anyone who can put aside £5000 (or £10000 on investments) should not get relief ad infinitum !
Unearned income used to be taxed at a higher rate the earnings.I would suggest an exemption on the first £500 of unearned income ( maybe further consideration for pensioners), ISA’s could then be scrapped.