Increased ISA allowance won’t help savers

Rebecca Atkinson's picture

Over the past few months, Moneywise has highlighted again and again the plight of savers hit, first of all, by the financial insecurity of the banking sector and then again by the historically-low Bank of England base rate.

I am one of the lucky ones, as my savings (such as they are) are in fixed-rate accounts and so haven't lost any of their value, other than through inflation. However, these fixed rates of interest won’t last forever, and I’m in a pickle as to where on earth to put my money once the great deals I picked up last year expire.

At the same time, my mortgage is on a variable rate, and at the back of my mind there is a constant concern about how I will afford my repayments once base rate returns to ‘normal’ levels – or potentially even shoots up to cope with hyperinflation, as some experts predict.

Building on my savings buffer and, at the same time, using as much spare cash as I can to pay off my mortgage and beat falling house prices, are my two chief aims this year. So I was hoping for some measures in the Budget that might help me achieve these.

The increase to the ISA allowance wasn’t a massive surprise – after all, Gordon Brown all but told Radio Four listeners back in March that this was what he intended to do. But I remain far from convinced how it will actually help me.

In case you haven’t seen the headlines, from 6 October everyone over the age of 50 will now be able to save up to £10,200 in an ISA, of which £5,100 can be held in cash. From April 2010, the rest of us will be able to do the same. Read the full story here

My two chief complaints are, firstly, why are the over 50s able to benefit from the chance this year while the rest of us have to wait nearly 12 months? I know that savers in this age group have suffered enormously from base rate cuts, with many seeing their incomes more than halve, but I have to speak up for the 20, 30 and 40-somethings – not only are we more likely to have high levels of debt, but we are also as much in need of savings as older members of society.

Why has the government decided to phase in the increased ISA allowance? Why not make it available to everyone from this year?

Could it be because the government's coffers are empty?

Secondly, and perhaps more importantly, the problem with raising the ISA allowance is that it won’t make it any easier for people to save. First off, so many of us simply don’t have enough spare cash after paying day-to-day living expenses to save any more than we already do.

Secondly, many people like me - with mortgages and other debt - may feel that it is more important, and cheaper, to prioritise paying this off rather than building our savings up any more.

Last, but not least, I fail to see the benefit of saving more when the return I will soon get on my money held in cash amounts to so little. Even if I was able to invest the full £5,100 cash ISA allowance from today, with the average cash ISA paying just 0.63% (according to the Bank of England) I would only earn around £30 in interest.

Even with one of the best fixed and variable rate deals, which currently pay around 3.5%, my money would only grow by £181 after one-year. Not that I’d turn this down, but when you consider how much many essential items have increased in price by (gas and electricity, food, petrol and council tax to name but a few) I can’t see it going too far.

Your Comments

I could not agree more with your views on the increased Isa allowance.I would however make 2 points.

1.Taking a long term view and assuming we ever get back to Isa rates of say 5% one day,the tax free allowances are worth having.As they say about the Isa allowance use it or lose it.If you take up the cash Isa allowance you can of course switch to a share based Isa at any time in the future.

2.I also have unit trusts from which I take an income.I now plan to shelter more of these within an Isa for the following reason.
As someone approaching retirement,the age allowance is important to anyone over 65 and by sheltering what you can you may save on tax.For every £2 of income above the age allowance threshold,currently £22900 per annum,you pay £1 in extra tax.Income from within Isas is not included in this calculation however.Worth remembering if projected income in retirement is likely to exceed the age allowance.

I take the view that EVERYONE is going to end up paying more taxes in the medium/long term because Britain is technically bankrupt - so take whatever crumbs the government passes your way!