Budget changes mean bad news for savers
As the dust settles on chancellor George Osborne's electioneering Budget, it's becoming clear that the changes to Isa and savings rules announced last week are sending contradictory and unhelpful messages to savers.
Tom Stevenson and Maike Currie, investment directors at Fidelity Personal Investing, say that the headline-grabbing adjustments have served to complicate the Isa arena and indeed could put people off developing their savings habit.
The announcement that there will be no tax to pay on the first £1,000 of interest earned in hitherto taxable savings accounts (£500 for higher-rate taxpayers) from April 2016 means that for almost all savers there is simply no point in selecting a cash Isa with limited contribution allowances over an unwrapped account.
"With interest rates as low as they are, you could shelter an amount far exceeding the annual cash Isa allowance in several savings accounts without paying tax," says Currie.
Graduating to the stock market
But she points out that, historically, most people have 'graduated' to stock market Isas via cash Isas; by making cash Isas effectively obsolete, she says, there's a grave risk that "many people will never make the jump to stocks and shares Isas", where they could earn better returns over the long term.
Meanwhile, it has emerged that only cash Isas will be eligible for the new flexibility from autumn 2015 to withdraw and replace Isa funds without losing the tax breaks on that money (provided it is repaid into the Isa account in the same tax year as it was withdrawn).
As Stevenson observes, cash Isas are therefore being comprehensively undermined on one hand, and yet being made more attractive and flexible on the other. "What was a simple savings vehicle has become quite a complicated one," he says.
Moreover, adds Currie: "On the face of it, the flexibility to take out money in the same tax year without losing the tax free status of their savings looks like a big win for Isa savers. However, unless you were using your full Isa allowance each year, this newfound flexibility will probably make very little difference to you as you will still have some of your Isa allowance left to use."
Nor does it appear that help-to-buy Isas (Hisas) have been fully thought through. These are tax-free savings accounts with a government top-up, for use by first-time buyers saving for a deposit on a property. But only cash accounts qualify for Hisa status; funds and other stock market investments are not eligible.
"Yet young people investing for a minimum five years, which is the length of time it will take to save £12,000 at £200 a month, could arguably consider going into the stock market, where they would stand a reasonable chance of a higher return over that length of time," Currie says.
"Given record low rates, any bank offering the Hisa is unlikely to pay you large interest returns. In five years' time, house prices will already have moved on significantly."
"Additionally, Hisas are very restrictive in that they can only be used for a property purchase - they are not helping foster the wider savings habit," she adds.
"This is not a Budget for savers; it's a budget for an election campaign," says Stevenson.
Currie adds: "Isas are highly popular with the public, and we have always maintained that no sensible government will interfere with these savings vehicles too much - they're one of the few really trusted products within financial services. They're popular, generous and simple to understand.
"What George Osborne has effectively done is add some extra layers of complication to this savings vehicle, with few real benefits. Sometimes too much choice can be a bad thing."
This article was written for our sister website Money Observer
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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.