/ 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

One reason for any lack of take up of ISAs is that much of the original tax advantage has been lost and Banks pay derisory rates of return. In spite of this I have invested in ISAs (Stock & shares) since the first PEPs were available and now have a very useful tax free supliment to my pension. Why wouldn’t we want to encourage that sort of prudent investment?

One cannot place the whole ISA amount into a cash ISA so, if you wish you can put the remainder into equities and, perhaps, earn more. I keep some cash for emergencies and, although a pensioner, pay tax. What better than to shelter my emergency money from tax. Although the rate is poor just now there is the tax relief to add in. Cash ISA’s are of no benefit to non tax payers so why concentrate on the poor basic return and ignore the tax relief? Like everything in the financial world one has to view the product with great care and take all factors into account.

Ed says:
7 May 2011

As a low income earner saving by ISA has been very beneficial to me. In addition to this my favourable Tax allowance for this financial year means that I would be able to make some small sacrifices and save a little bit more in the event that I might not be able to save anything in 2012 financial year as by then I would have saved enough deposit for a new mortgage for shared ownership housing. I would not have been able to save for decent housing without the benefits of an ISA. The government should be targeting more the rich off shore fraudsters.

I haven’t voted, because the issue is not clear-cut. Low earners gain little benefit from ISAs, especially if they pay no tax. And in any case, ISAs are currently offering interest at rates lower than inflation. The proposed scheme would be of great benefit to low earners. Otherwise, I would like to see ISAs being obliged to offer interest rates linked to inflation as well as bank rate.

Michael of Bisley says:
7 May 2011

I thought it was a shame when Mr Brown changed TESSAs to ISAs which are so much more complicated for those just wanting a cash investment plan. However, they are still a fairly straightforward way of saving and as others have commented, banks – and the Government – should publicise them. The banks do need to play fair and offer good rates since they still get the same gains, whether an ISA or a traditional investment saving account.

SX Dave says:
7 May 2011

ISA’s are fine, but cash ISAs are a bit of a snare and a delusion, since they won’t keep up with inflation anyway and you have to keep your money on the move every year if you want to earn anything like a decent rate….

David Norman says:
7 May 2011

There are all sorts of issues floating around here:

Cash (in whatever wrapper) has never beaten inflation over the long run.

We are in a hideous situation at present where banks are desparately trying to rebuild their balance sheets (because the regulators don’t want a repeat of the credit crunch). Trouble is that means charging more for borrowing and paying out less out in interest.

The world went mad before the credit crunch. I bought a tracker mortgage in 2007 that had an interest rate of 0.18% over base rate. That means I am paying 0.68% at present. But it also meant the bank could only be making 0.18% profit as a maximum. That was commercial suicide…..and we are all paying for that now.

Traditionally banks would lend money at base rate plus 1.5% and pay deposits at base rate less 1%. Healthy 2.5% margin. Though some borrowers would not pay back their loans so some of the margin was lost to bad debts.

We are now in the crazy place where lending and borrowing rates are both above base rate. Most secured lending is 5 – 7% over base. This means deposit rates will be 1 – 3% over base. This is why savings rates are about 1.5 – 3.5%.

The banks are also very nervous about the amount of personal debt in the UK. I can not understand why so many people have credit card debt paying 19 – 25%pa interest. As a nation we have completely lost the notion of saving up to buy something – we just stick it on the credit card (encouraged by the bank again!).

Whoever was supposed to be regulating the banks should be shot.

Equities (if they can be bought and held cheaply) have beaten inflation but they are much more volatile and should only be held if you have a 10 year time horizon.

Historically equities paying a good dividend have been an excellent investment (if held for the long term 10 years or more). Dividends from quality companies have historically beaten inflation. This means even if your capital went up and down, the income would steadily rise.

BUT the most important two rules of investing are 1. Keep costs low. 2. Diversify (don’t put all your eggs in one basket (equity, ISA or bank).

The banks used to be a great investment as they paid good dividends, but banks (and their investors) they got greedy….and we all know what happened to the banks share price (we ended up buying them to rescue them). Again diversification was key.

The banks also sold stocks and shares ISAs, usually with funds managed by the bank inside, but their fund costs were high (surprise, surprise) so they don’t perform well. They also tend to be very narrow in what they invest in – so are very volatile. You need a fund that invests very widely and at very low cost to get the best returns (for most peple a good mix of equities (UK and International), bonds, property, cash etc).

Cash ISAs have to be managed carefully, banks get up to all sorts of marketing ploys to suck you in with a high rate that lasts a year and then turns into 0.05%. Unsurprisingly they also make it very hard to transfer between banks and even between old accounts and new accounts (scandulous).

And of course the real nasty is that to get the economy going the Bank of England (and government) is keeping interest rates low. And neither the Bank or government is too fussed about high inflation in the short term (because it has the effect of shrinking the Govts debts).

What that means is that people with mortgages / debt are being subsidised by those with cash savings. Rates are low and inflation is high. That is particularly unfair as it borrowers not savers that arguably sowed the seeds of the credit crunch (and stupid regulators).

We have bailed out the banks and we are now paying all over again for them to rebuild their balance sheets.

We need some new “good” banks that will pay sensible rates, lend repsonsibly and do not issue credit cards….perhaps Which? can start a campaign for good banks…..the ones we have at present are clearly well past their sell by date, as is the regulator of them.

Hi David,
Which? is working hard to campaign for better banks so that consumers like yourself are treated fairly by the banks. If you feel strongly about this subject you should register for our ‘Your Voice’ banking event we are holding next week. The event, held in conjunction with the Independent Commission on Banking, gives consumers a chance to share their views on the future of the banking industry. The details of the event are linked to below.

http://www.which.co.uk/campaigns/personal-finance/your-voice/get-involved/

evie says:
7 May 2011

As has already been suggested, low-income households do not benefit from ISAs because they do not have any money to save – if you are watching every penny, you cannot afford to put anything away, especailly if you get hardly any reward for doing so. The new proposals would provide a much greater reward, and could possibly provide enough incentive for families to try and save £1000 if by doing so they will earn £100. Such sums may be trivial for those who have a comfortable nest-egg, but for those without, an extra £100 (instead of £10 or less) might make a huge difference.

If I did have money to invest, I would always look at NS&I – although not ISA’s, there are investment vehicles around with reasonable rates and security.

Gerard Phelan says:
7 May 2011

The greatest barrier to savings by the lower paid is surely the tax and benefit trap whereby if they have worked out how to claim the benefits they should be claiming, then additional income, such as that resulting from a promotion is effectively taxed at 60% or more as a result of withdrawal of some of those benefits. Ensuring that the effective tax on the lower paid is just and simple should be the #1 priority of Government and its Think Tanks.

HOWEVER, ISAs are not JUST a tool of the equality movement, one intended to assist the poorest in Society. Other arms of Government want all people to have savings so they can survive illnesses, family emergencies and short term unemployment. People who deride savings as “losings” and buy new cars etc.. using up all their income are immediate big problems for themselves and for an orderly society, when the unexpected happens and their income vanishes.
Cash ISAs can provide the “pot” of money to provide that help, provided it is earning a fair interest.

WHY do people put up with derisory interest rates – one earlier writer writes of receiving 0.25%? If your TV reduced the colours it allowed you and left you with Black and White, would you sit and do nothing? I think most people would take action. Unlike fixing or replacing a TV, moving a Cash ISA to a new provider is free! The HBOS Direct Reward (issue 4) Cash ISA give 3% for a year and there are many others. We live in a MARKET economy – there is always another trader with fresher products to be found. Moving your ISA effectively gives your old provider the kick in the teeth writers here appear to relish giving them! Many people here seem to prefer to eat the mouldy products their first choice provider now gives them – perhaps out of misplaced loyalty. FORGET LOYALTY. If they had been loyal to you, you would not have written about low interest rates (and about high costs of equity ISAs).

Lesley says:
8 May 2011

I agree with others who have pointed out that the financial advantages of ISA’s lie with the banks not with the savers because banks are allowed to offer such low rates of interest. Even though the savings are tax free in many cases it would still be a better option to go for an account with a higher rate of interest and pay the tax. It costs the government a hugh amount in lost tax revenue but savers are no better off.

hurricanheidi says:
8 May 2011

I have just paid off my ( 3rd property , 4th property loan ) mortgage after 32 years & can save for the first time . If you are financially stretched you are very busy doing extra work & overtime , studying for promotions etc . You don’t have time or or spare neurons to learn about investments . Simple = good . So ISA’s score because they are relatively simple .

GORDON RINGROSE says:
9 May 2011

I have not used cash ISAs because I’ve always been able to accept the risks attached to investing in the stock market. I have used investment ISAs extensively (and PEPs before that) – sometimes doing very well and other times not so! I understand the comments about cash ISAs – but the alternative seems worse – particularly when set-up costs are taken into account.

Brian says:
9 May 2011

I’m for ISA’s BUT my bank (Halifax) did’nt play fair-I’ve had a ISA for many years and only found out by chance this March that my rate was 0.5% or something similar and I needed to sign a simple form to change it to 3.0% forthwith. So come on bank lets play fair with OUR money!

SteveK says:
9 May 2011

I couldn’t save a bean for years. Then Which? ran an article on Friendly Societies. Somehow I managed to put away the £9 a month that was all that was allowed at that time. A little late I managed to take one out for my wife too. When the maximum went up to £18 it was a struggle but we matched it and when it went up to the present £25 a month we met that increase too. Then the PEP came along and although we had no chance of achieving the full amount, we couldn’t resist the lure of keeping what little we had tax free. The cash ISA followed and by making the maximum my target I’ve managed to just reach it the last three years – but not for my wife. Having that target has been my big incentive to save for many, many years now. Without it I hardly think it would be worth saving just to see what little I could make in interest being eroded by tax. The FS, PEP and ISA have meant that I should avoid the benefit queue in my old age and live more comfortably than I would have done without these schemes. There must be many today who could start with the Friendly Societies – if anyone knew about them – just as we did and then catch the “save free of tax bug”. Yes, you have to move your money nearly every year but if Which?’s campaign for less disreputable behaviour by the banks, etc. is a success that may become less of an issue.

The new proposed plan will not encourage long term saving – a rapid reduction of return after £1000 is saved – Most savings plan give better returns the more you save,

I S A Frustrated says:
9 May 2011

The government should insist that a bank can only offer one rate for their ISA investments, with perhaps the slight variation that higher rates could be offered if a longer period of notice to withdraw is accepted. Clearly the bank will want the right to vary the figure up or down and the years go by, but that should apply to all those investors accounts.
The priciple of the government allowing interest to be free of tax to encourage people to make savings is very good. It is reasonable for it to define limits to the level of investment for each year so that the system is for the general public and discourages speculative investment. The rules should prevent banks from introducing a good interest rate for one or two years and then automatically dropping the interest rate to near zero. For those saving for their future it is very discouraging to find the rate drop automaicaly after 1 or 2 years, and then having to seek alternative home for the saving – This is no way to encourage saving!

JR says:
10 May 2011

Cash Isa’s are just an incredibly easy way for banks to earn big time at the public’s expense, backed by the Government, in my now jaundiced view. I went into my long time supplier (Big High Street establishment, old name used to rhyme with flabby, shabby, grabby, ******. Ok, maybe ****** doesn’t quite rhyme, but hey, let’s leave it in the list) and complained about the ridiculously low rate of interest on my ISA. The staff basically blamed me for the situation, and justified it by saying that I would be as poorly treated by any of the other providers, so why should I change? I asked what had happened to rewarding loyalty and wanting to keep the customers satisfied. Didn’t get a response. Moved my ISA from there ASAP. I’ve got my mortgage there too, but I’m going to move that as soon as I can, oh and while I’m about it I think the money in my savings account as well. I’ve no doubt that the ISA’s providers work out the trade off of the loss of dissatisfied customers v apathy of customers v new incoming business, and then decide that it’s not worth treating long term customers properly. Perhaps there’s a market out there for being an ISA provider that treats customers as though you actually want them after the first twelve months? The Government should act, but to make these ‘investments’ worthwhile. The original intent to encourage long term saving has been lost in my opinion. Additionally, I agree with previous correspondents about the elderly/infirm having difficulties with monitoring and switching providers.

George Mellar says:
12 May 2011

I think the same as Ezzywuke. ISA’s are only of benefit to the Building Society or Bank, as the interest is almost always far less than in taxable investments.
It is also, all very well tying up large sums for a long time when you are young. But when you are older and need to use your savings, you still deserve at least a rate that keeps pace with inflation.

George

Phil in Woking says:
13 May 2011

I am a retired high rate tax payer. I have never invested in an isa due to poor returns on investment. As many other posters have highlighted, ISA providers have taken much more than a fair share of the tax savings originally intended (surely) as an incentive for the saver. Despite the resultant poor returns, ISAs have been a huge success. The original aim of encouraging folk to save has undoubtedly been achieved.

Given the huge momentum of the ISA market, it would be very difficult polically and practically to scrap them.. However Which? would do well to encourage legislation to limit the ISA providers take, For example a minimum return of BOE rate + 1% or something similar. On invest only ISA’s, the market does seem to be moving. At least one provider has introduced an ISA where the only charges are the costs of trading the shares ( possibly leading me to invest in my first ever ISA).

Good to hear all your views on Isas – and to see such support for keeping them. Does this mean that people are enthusiastic about Junior Isas too? We’ve got another Conversation running about Junior Isas, so be sure to come and tell us your view on that too: https://conversation.which.co.uk/money/junior-isas-savings-for-children/