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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