Have Budget changes made cash Isas worthless?
Around 28 million savers are set to benefit from a radical overhaul to high-street accounts next April. From then every basic-rate taxpayer will be able to earn £1,000 interest a year without having to pay tax. Higher-rate taxpayers will be able to earn £500 interest.
From 6 April 2016 banks and building societies will stop automatically deducting interest from your savings. It will all be paid before tax.
Those who earn below £16,800 a year won't have to pay any tax on savings interest. Meanwhile, if you earn less than £42,700 - the point at which higher-rate tax starts - you will be allowed to have £1,000 in savings interest tax-free.
Those with earnings from £42,701 to £150,000 will have a £500 allowance. If you earn more than this and are in the 45% tax band, you will pay tax on all your savings interest. This makes cash Isas - where your interest is automatically tax-free - suddenly seem identical to an ordinary high-street account for most people.
Don’t ignore your cash Isa
Another change to come in later this year will let savers withdraw cash from an Isa and put it back in again without it counting towards their annual allowance of £15,240 for this tax year.
The difference between the two types of accounts will become clear if and when interest rates do go up. When that happens, £1,000 of interest may not seem a lot. In an account paying 3% it would mean savings of £35,000 would put someone over the limit as a basic-rate payer.
Patrick Connolly, chartered financial planner at independent financial adviser Chase de Vere, says: 'I recommend still using your cash Isa allowance. You don't pay any extra in charges and the interest is likely to be tax-free for a very long time.'
He adds: 'There is more chance of changes to the new £1,000 personal savings allowance and tax rates than the government introducing tax on what you have saved so far in your cash Isa.' Moreover, banks and building societies generally pay higher rates on cash Isas than on taxable accounts.
HSBC current account holders can go for the bank's Loyalty Cash Isa at 1.5% plus an extra £10 a month interest to Advance customers, 1.6% to Premier account holders and 1.4% to its other current account holders. It's a much better deal than its taxable easy-access account, Flexible Saver, which pays a pittance of 0.1% before tax (worth 0.08% after tax).
Santander and Nationwide both pay 1.5% on cash Isas to their current account holders. And you can transfer your existing cash Isas into these accounts. Other top-paying cash Isas include Skipton Limited Edition Online Isa at 1.6%, along with National Savings & Investments Direct Isa at 1.5%.
Skipton Building Society Limited Edition Online Isa: 1.6% on minimum £1, no bonus or withdrawal restrictions. You can transfer your existing cash Isas into this account.
Virgin Money Defined Access Saver: 1.41% before tax (1.13% after tax) on £1 or more. You are limited to making three withdrawals a year.
Sums of more than £85,000 that are in your bank account for a short time should soon be protected under the compensation scheme. New rules to come into force on 2 July will give you extra cover under the Financial Services Compensation Scheme (FSCS) for up to six months.
Under the current scheme, the maximum you can get if your bank or building society goes bust is £85,000 per person - or £170,000 on joint accounts. To plug the gap, the 'temporary high balance' will cover up to £1 million for six months.
It will give you breathing space while you think about what you want to do with the money from the sale of your house, or if you get an inheritance or divorce settlement. It will also cover payments coming in if you have set up an equity release scheme or received a payout from an insurance company.
The new limit comes in just three months after the sweeping pension changes which allow you to take the large sums as cash from your pension.
The Bank of England, which proposed the new temporary cover, says it should cover 99% of money from house sales in England and Wales.
If you claim under the new rules, you have to prove to the FSCS that you had the money in the bank temporarily. The scheme has three months to pay out a high temporary payment once compensation is granted. Under the normal £85,000 cover, the payments are typically made within seven days of the bank or building society failing.
This article was written for our sister website Money Observer
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.
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.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.