Get ready for the ISA muddle
Older savers looking forward to receiving extra tax-free interest in October could be disappointed, as ISA providers struggle to adjust to the new allowance.
The tax-free allowance for those aged 50 or over rises from £7,200 to £10,200 on 6 October, with the amount that can be deposited in cash increasing from £3,600 to £5,100.
But fears are mounting that not all banks and building societies may not be able to cope with the new rules. "There is a risk some of the smaller building societies will not be ready, as they don't have the luxury of a big IT team," says Andrew Hagger, spokesman for data provider Moneynet.co.uk.
He adds: "It's a major change - it's halfway through the tax year and the change only applies to a certain age group."
According to a Moneyfacts poll, just over half (51 out of 93) of cash ISA providers say they will accept the top-ups in October. The remaining 42 had not responded. Worryingly, big names such as Alliance & Leicester, Egg and NatWest were among those who hadn't responded.
It is not compulsory to offer the top-ups to the over-50s: HMRC rules simply allow the new maximum to be offered.
National Savings & Investments, Family Investments and building societies Newcastle, Leeds, Saffron, Dunfermline, M&S Money and Principality have confirmed they are ready for the October deadline.
"I'm not aware of any societies that have said they will not be offering the top-up," a spokeswoman from the Building Societies Association said. "The decision to introduce the change for the over-50s halfway through a tax year means two sets of difficult system changes within six months, at a significant cost to providers."
Matt Pitcher, senior wealth adviser at Towry Law, agrees it is an awkward change to make and believes "there is a significant risk that providers won't be ready".
He adds: "The increase from April 2010 [for the rest of the population] is likely be handled more smoothly."
There are particular concerns for savers who have already taken out a fixed-rate ISA as these accounts cannot usually accept additional funds. Newcastle and Leeds building societies, however, have confirmed they will be able to sidestep the rules by allowing fixed-rate customers to top up by £1,500.
While the new ISA allowance seems generous on the surface, the extra tax-free interest won't amount to much in reality. Hagger points out that a payment of £1,500 into an ISA paying 3% interest over the next six months would earn just £22.50 in interest.
In a standard account paying 3%, a basic-rate taxpayer would earn £18 interest. A higher-rate taxpayer would earn £13.50.
It is unclear whether the over-50s top-up will also pose problems for stocks and shares ISA providers. Fidelity FundsNetwork, Interactive Investor and Selftrade have all said their ducks are in a row.
"We have worked hard to ensure our customers can avail themselves of the maximum allowances available. Some investors may be disappointed if their provider isn"t ready," says Rebecca O"Keeffe, head of investment products at Interactive Investor.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.