Assault on savers?
The chancellor’s latest attempt to boost the UK’s savings habit appears to have fallen at the first hurdle.
When George Osborne announced his ISA reforms earlier this year, introducing more flexibility and an enticing increase to the annual allowance, he had high hopes of reigniting the savings culture. Yet three months on from the introduction of the changes in July, the average ‘no notice’ Cash ISA rate has fallen to a record low of 1.17%*. HMRC has also confirmed that there were 1.2 million fewer subscriptions to Cash ISAs in the last tax year than in 2012/13.
The typical rate has fallen now for five months in a row, despite the Bank of England base rate being held at a historic low of 0.5%. The savings industry lays the blame at the door of the government’s Funding for Lending Scheme, through which banks have had access to cheap finance on the condition that the benefits were passed onto borrowers. Consequently, providers have been less motivated to attract savers’ money and rates have suffered as a result.
Savers might question what role a Cash ISA plays in their overall investment strategy. Is it a tax-efficient home for cash that might be needed in the short term? A recent report from consumer group Which? highlighted that nearly four out of ten Cash ISAs had restrictions that prevent savers from having free access to their money, either by limiting the number of withdrawals or levying punitive penalties through loss of interest, lower rates of return or closure of accounts.
What’s more clear is that the long-term tax and investment benefits of the new £15,000 ISA allowance are wasted if it is deposited in a savings account on which the returns fail even to keep pace with inflation. Barely half of Cash ISA accounts on the market currently meet that target*. Based on the current average Cash ISA rate, a basic-rate taxpayer who deposited the full £15,000 would save themselves tax of just £35 a year on the interest earned. The benefits were even more marginal before the allowance was increased, yet Cash ISAs still accounted for three-quarters of new ISA accounts opened in the last tax year.
Encouragingly though, there are signs that investors increasingly realise that the alternative of a Stocks & Shares ISA offers a potentially better use of the valuable tax breaks. The amount allocated to Stocks & Shares ISAs increased 12% year-on-year in 2013/14, as investors have sought to take advantage of the recent recovery in markets. Making use of a tax shelter for assets more likely to deliver gains over the long term seems a logical decision.
If the ISA changes continue to encourage confident and long-term investment planning then Mr. Osborne could yet succeed in helping people safeguard their financial future.
The favourable tax treatment of ISAs may be subject to changes in legislation in the future. An investment with St. James’s Place will be directly linked to the funds you select and the value can therefore go down as well as up. You may get back less than you invested. An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.
*Source: Moneyfacts, September 2014