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Slump in popularity of ISA’s as saver’s priorities shift

HMRC figures show that the popularity of ISA’s is experiencing a slump. In 2015/16 the amount invested in ISA’s was £58.7bn, but this fell to £39.2bn in 2016/17. The number of ISA’s opened also declined by 1.6 million. Conversely, Stocks & Shares ISA’s seem to be a new favourite with savers; the total invested in these increased from £1.2bn in 2015/16 to £22.3bn in 2016/17. Many are also electing to set their money aside in traditional savings accounts or high-interest current accounts.

However, are savers simply being too hasty when it comes to ignoring the ISA?

Why you shouldn’t dismiss ISA’s instantly…

The answer is ‘possibly’ – but first, it’s important to understand why the ISA finds itself at the bottom of the pack. A significant factor in this is likely to be the Personal Savings Allowance (PSA). The PSA allows savers to earn interest on savings before being taxed, leading many to question the value of ISA’s. The PSA applies to taxpayers as follows:

  • A Basic-rate taxpayer is entitled to £1000 in interest before tax is payable
  • A Higher-rate taxpayer is entitled to £500 in interest before tax is payable
  • An Additional-rate taxpayer is entitled to £0 in interest before tax is payable

In addition to this, of late, ISA’s have been achieving relatively disappointing interest rates, with most struggling to exceed 2%. Low interest rates coupled with rising inflation will result in a real terms loss for many people. Consequently, as people’s priorities shift, many are deterred from relying on ISA’s to protect their investment.

Still, there remain some perks to saving with an ISA, in spite of the recent show of reluctance. ISA’s have received and continue to receive significant support from the Government, by way of increased allowances year-on-year and new launches for niche audiences such as the Help to Buy ISA and the Lifetime ISA.

Commitment from the Government suggests that ISA’s are here to stay whilst the PSA could be withdrawn at any time. If this were to happen, what may have started off as a tax-efficient arrangement could quickly become much less so.

Furthermore, interest rates are unlikely to stay low forever; should they rise, not properly protecting your savings against tax liabilities could be a costly mistake as your investment devalues. ISA’s are principally ‘future-proof’, providing a tax-free pot to keep your cash in, whatever the circumstances.

Food for thought…

If you’re currently contemplating where best to put away your pennies, ISA’s should still be a consideration. You may just need to work a little harder to find the right account, with a reasonable interest rate. Since 2015, ISA savings can now also be passed to a spouse or civil partner, upon death, without forfeiting the tax-free wrapper. Anyone whose spouse or civil partner died on or after 3 December 2014 is eligible for a one-off additional ISA allowance, equal to the value of the ISA at the time of death. Don’t, however, assume that the savings will be exempt from IHT as this is not the case.

You can find out more about the rules associated with transferring ISA’s to loved ones upon death on the Government website, here.

It may also be wise to consider Stocks & Shares ISA’s as these can offer better long-term returns, though of course this is not guaranteed. They are, however, free from any Capital Gains Tax charge on disposals of shares held within the ISA.

If you’re looking to start a ‘rainy-day’ reserve, we can help. Contact our team today for advice on how to secure the most tax-efficient home for your hard-earned money, on 01767 315010.

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