The Individual Savings Account (ISA) has been the short and medium-term savings vehicle of choice since they replaced PEPs and TESSAs in 1999. However, last year had the lowest number of people paying into ISAs since the second year of their life – why?
The easy and obvious answer is that fewer people have money to save. Whilst this may be a factor there are two other reasons I believe are causing the love affair to end.
A lot of people think they no longer need the protection from tax that an ISA gives. The Personal Savings Allowance means that basic rate tax payers need to receive £1,000 in interest before they pay income tax on their savings, whereas higher rate tax payers benefit from a less generous £500. In the current low interest rate environment this means realistically a basic rate taxpayer needs upwards of £60,000 in savings accounts before they’ll exceed the allowance. The temptation for those with smaller amounts is not to bother saving through an ISA. However, as interest rates rise the amount you need saved to breach the allowance will decrease.
Those with investments may again believe the dividend allowance and Capital Gains Tax (CGT) allowance mean they don’t need the protection from tax an ISA provides and are often a long way away from fully utilising either allowance. However, politically it would be far easier for a cash strapped Chancellor to reduce, restrict or remove the Savings, Dividend or CGT Allowance than make ISAs taxable. We’ve already seen the dividend allowance slashed from £5,000 to £2,000.
The other issue is the increasing complexity of the ISA regime. As well as cash ISAs and Investment ISAs there are now Lifetime ISAs and Innovative Finance ISAs, as well as the legacy Help to Buy ISAs. These all have their own limits and rules. The Lifetime ISA has rules around ages you can pay in and access it, as well as government bonuses and penalties; things are not a simple as they used to be. With the tax savings on offer, it is likely to be beneficial to rekindle your savings and investments relationship with the ISA.