/ 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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Ezzywuke says:
6 May 2011

ISA’s would be fine if the banks played fair – and I speak as an ex Bank Manager. Too many ISA’s pay very low rates and often you would be better off with an ordinary tax paying account. Basically banks use ISA’s as cash cows and the only ones getting fat on the tax breaks are them. It isthe old ploy of offering a high rate to attract people in, usually in the form of a bonus for 1 year after which the rate plummets. I have my ISA with my old bank, and every year I have to go in and transfer my account across to the new issue to get a better rate, otherwise it would sit earning 0.5%. The Banks play on people’s natural laziness and inertia. The people I really feel sorry are the old and infirm, often they cannot keep up with all the changes, and are unable to visit their branches for advice. There are millions of pounds sat in “old ” accounts earning derisory rates. It is high street robbery of the worst kind, taking from those least able to look after their own money. There should be a statutory minimum rate on an ISA – perhaps which would like to campaign for this.

Ed says:
7 May 2011

Ezzywuke, I must agree with you. There have to be a change in social attitudes as to how we deal with our personal finances. Perhaps this – hopefully more aware – generation will campaign for better education at school for their offspring to include financial awareness in similar robust ways that we have seen in improving health education. Perhaps, you, Ezzywuke, might like to consider doing for finances what Jamie Oliver has done for healthy foods in shools.

I am considering moving all my cash ISA’s into index-linked accounts. At least I could then not have the hassle of moving them every 12 months. My two index-linked ISA’s taken out many years ago have been consistently outstripping the others.

Alan Berrill says:
9 May 2011

I absolutely agree with the ex bank manager. Banks should not be allowed to reduce their interest rate from the initial rate offered to lure in investors. There would then be no necessity for transfering from initial bank to another. The maximum investment should be for cash (not stocks & shares -which are not a safe investment for most !). Paper work for isa’s is ridiculous!
Isa’s should always be the best deal ! ,same best rate for all ,graded percentages not allowed for tax free savings.

Joe says:
12 May 2011

I agree wholeheartedly, if the government want people to save money why don’t they try and protect ordinary people’s savings.
the truth is they don’t care they are too busy lining their own pockets.

Phil Gatley says:
6 May 2011

So many times over the years, the names of things are changed and why. ISA means Individual Savings Account. So whatever replaces it will still be for individuals (as opposed to businesses) and it will still be a savings account. So why waste a fortune on a change? Add in of course that the vast majority of us are earning less and having to pay more for everything, so where are we supposed to find the spare money to save?

Unimpressed says:
6 May 2011

As Ezzywuke says, above. There should be some minimum and FAIR interest rates for consumer savings, enforced by public law. It is a foul thing that the banks charge us say… 20% or so for a loan / credit, but then give us less than 1% for the joy of essentially loaning them our money to play with… at OUR risk.

Sue says:
6 May 2011

I’ve never had one. Too many options have just left me totally confused. As with all financial matters the amount of choice has increased far too much for most people to be able to do anything but stick a pin in a sheet of paper.

V & H Robinson says:
6 May 2011

We are appalled at this suggestion. We have been building up tax free cash ISAs since they were available and this enables my wife in particular (who’s low retirement income means she is a non-tax payer), to invest money without the income putting her into the basic rate tax bracket. The rates are currently very low, but they originally started at 6%. Of course we have to change providers frequently to stop the rate falling to 2nd year rates 50% lower or worse. No wonder people with low incomes aren’t interested. Longer term we hope the rates will rise and you can get 5% now on longer term commitments. We assume that when the Base Rate eventually improves the ISA rates will be better.
As I read it, the new proposal gives 3.33% tax free on your 3rd £1000 and above for life. That is a pathetic investment. The financial institutions must think it’s Christmas all year. Who is paying the IPPR to come up with this grossly unfair idea. When are we going to have a Government that is prepared to give low income families a better deal in all walks of life.

So less than 1/3rd of lower-paid families have an ISA. So what? The clue is in the phrase ‘lower-paid’. If they replaced them with something else, they would find that less than 1/3rd of lower-paid families had one of those as well!

There has been some mention of the low rates currently available in Cash ISAs. But Gareth Shaw pointed out that ‘the average Isa hasn’t ourstripped inflation since December 2009’.

That’s less than a year and a half. To scrap a system because it offers slightly less value for a few months smacks of short termism.

Barry jackson says:
7 May 2011

Little is mentioned about pensioners who’s savings, however invested, receive derisory levels of interest. The Isa is no exception in this regard, so after the current spell of low interest rate who’s end point remains obscured, its value as a method of saving is questionable. The investment industry continues to dictate its own terms simply because the can,leaving small investors with no real choices. Governments seem impotent in the face of the Bankers, with no one Government willing to risk a rugged confrontation with them. It seems to me that “people power” may be the only way forward.

Ian says:
7 May 2011

I voted for scrapping ISAs on the grounds that overwhelming beneficiaries of the current system are the banks which, as a previous contributor noted, cream off most of the benefits by offering lower interset rates on ISAs than on their non-subsidised products. The result is that much of the loss to the taxpayer by providing tax-free accounts accrues to the banks – a transfer from taxpayer to bank, not to saver. If you are not a 40% taxpayer you may well get a better deal on a fixed rate savings bond than on an ISA.

I am astonished by the think-tank’s logic. They are saying, in effect, that because pedestrians are still being knocked down crossing the road, zebra crossings have failed and should be scrapped. Of course, the rich would be foolish not to take advantage of an available tax-free wrapper even though, for them, the amount they can protect is miniscule. How does that translate, though, to saying that the rest of us should be denied the benefit? Do they know how many “rich” people have ISAs compared to the rest of us? I am a pensioner and before that a not very well off civil servant but I have had PEPs and then ISAs since they were invented and have built up over very many years a sizeable (for me anyway) nest egg that provides for some little luxuries to supplement my pension. We should fight this stupid idea with all means at our disposal. We could start by scrapping political think tanks who have nothing constructive to suggest to persuade “poor” people to save. What about providing them with jobs and a living wage so that they have the means to save in the first place?

I bought “ISAs” just prior to 9/11 through a major bank. My savings were locked in for 5years and the ISAs were linked to the stock market. We all know what happened next, the market crashed and so did my savings.
There are too many ways to invest in ISAs unless you have a good understanding of the markets and the advise you get ( or got ) was not always the best for each individual.
My money was tied up waiting for the market to recover, money that I could not afford to lose, in the end I had to cut my losses.
Buyer Beware.

L. Fisher says:
7 May 2011

Isn’t it obvious that the lower the earnings, the lower the take up of ISAS is down to nothing more sinister than the fact that those on low incomes have less, or more probably nothing, left over after their weekly outgoings, to save?

Bob says:
7 May 2011

I used to take out a maxi ISA every year. I took careful advice about which to choose and after 20 years I can honestly say they’ve been a waste of money. Even if the risk is spread, one bad result can negate the benefits of the many other good results. It seems that as the years go by and benefits become reasonable there in another ‘financial crisis’ which completely obliterates all the profits.
ISAs were clearly set up for the benefit of fund managers who continue to charge annually even when there are clear losses, and take no responsibility for their lack of skill. The rates now expected are so low that alternative investments are much more attractive.
Six months ago I was persuaded to restart ISA investment with a large and safe company. I see that the value has decreased by 1.3%. I will be terminating this ISA for a better deal and will never consider ISAs again.

MJ says:
7 May 2011

Even though the rates for cash Isas are now poor they are still better than the instant access or bond rates and many older people invest what spare money they have in order to gain the 20% tax relief. Not a lot for those with plenty of money but for those on limited incomes, invaluable. Lets hope common sense prevails and Isas are kept.

V. Squeezed says:
7 May 2011

Scrapping of ISA’s must be opposed. Firstly taxing savings is a double taxation of income, and is nasty. Savings helps the stability of the economy and should be positively encouraged. After all it is the debt based society which has caused all the economic difficulty. ISA’s have allowed citizens to build up a nest egg over time. Scrapping them would be a severe discouragement to a savings culture, and would be seen as a money grabbing technique by a nasty government. Oppose with all might!

D.Howard says:
7 May 2011

As a retired Chartered Accountant I agree 100% that the Banks and Building Societies cream off the tax relief by offering lower rates on Cash Isas than on Non-Isa products.Regarding transferring Isas to another provider each year I have found the obstacles placed in the way sometimes make it more trouble than it is worth.Now I just close my Cash Isas and reinvest in shares paying a decent dividend.Admittedly there is some risk but at least I have the satisfaction of knowing that the Banks/Building Societies are not paying me a derisory rate of interest so that they can charge a subsidised interest rate to the over-extended borrowers who helped to get the country into the mess it is in today.

GDO'Callaghan says:
7 May 2011

ISA’s are good and should stay. You say education but such a comment, although well intentioned, is a comfortable middle class attitude. People on low incomes do not have money to save and often do not see beyond getting though the next week or month. As some of the above comments and those in the national press sadly spell out there is a much larger problem in general about understanding how money is created and its relation to personal and national wealth. Looking after your money requires effort, diligence and care. Reinvesting for profit even more so. If you hand it over to someone else to do it for you there is risk. It is your decision. But like all risk it can be reduced considerably by doing homework and by keeping a close watch on things. If that is beyond you don’t take part, or at the very least do not commit everything. And if it turns sour learn from the experience.

My wife and I are both retired, and my wife pays no Income Tax, while I am in the lower tax band. We have found that the returns are so low on ISAs that we get a marginally better return by buying fixed rate 12 month bonds through our Building Society. Older people especially are being held to ransom by the banking industry by supressing ISA interest rates.

Peter R Walker OBE says:
7 May 2011

ISAs are a help to all tax payers and should be more widely promoted by government. They are relatively simple to understand – especially cash ISAs and provide a rare opportunity to avoid paying double tax (i.e. savings are from income AFTER tax and tax charged on the interest from those savings represent a double tax). The low interes rates paid on ISA accounts are yet another demonstration of the Banks’ unethical business practices.They see ISAs as yet another opportunity to enhance profits. A set minimum rate tracking bank rate fluctuations should be made mandatory.

John Bloye Higgins says:
7 May 2011

I have recently cashed my 3 ISAS,all with different Managers. I’d had them for over 10yrs
and they were just “treading water”, infact one stocks and shares ISA with Nationwide realized
“less than I put in” , but the managers handling fees were always Paid by me .
I was so disgusted that I cashed the lot,and to **** with it , bought a new car , at least I have the pleasure of owner ship.
My advice ; buy Premium Bonds, I !did .

Kenley says:
7 May 2011

ISA’s have become too complicated and pay less than inflation. Why not reintroduce National Savings (NSI) which guaranteed to pay above inflation.

Ed says:
7 May 2011

Gareth / Kenley, many thanks for sharing this bit of news. Even better than I hoped, all is not lost.