The announcement in the Budget, that savers will now receive a proportion of their savings interest tax-free, has led some people to suggest that ISAs (Individual Savings Accounts) will no longer be needed.
Since its introduction the ISA has become the foundation of most people’s savings and investments, so is the future of the ISA really in doubt?
What changed in the Budget?
George Osborne has announced a new personal savings allowance will be introduced from April 2016. This will mean the first £1,000 of interest for basic rate taxpayers will be tax-free; for higher rate taxpayers the tax-free allowance will be £500.
According to the Chancellor this change means that 95% of savers will pay no tax whatsoever on the interest they receive.
He could well be right too, with savings rates so poor, most savers would need to have between £50,000 and £100,000 before their interest is taxed.
So no need for an ISA, right? Wrong!
Here are five reasons why an ISA is still an important tool for both savers and investors:
#1: Rules can change
Do you remember the 10% tax rate introduced and then withdrawn by the last Government?
Rules can change and although the Shadow Chancellor, Ed Balls, has said he doesn’t plan to reverse the introduction of the personal savings allowance should he be the next Chancellor, there is no guarantee it will be in place forever.
Holding money in an ISA, which has been around now for a considerable period of time, may therefore be seen as a safer option; although there is of course no guarantee that those rules won’t change either!
#2: What happens when interest rates rise?
The benefit of tax-free interest is certainly diminished when interest rates are so low. However, interest rates can’t stay this low forever; they will have to rise at some point; although with inflation so low no one is holding their breath for a rise this year.
When rates do rise, more people will receive interest on their savings above the level of the personal savings allowance (£1,000 or £500) and will end up paying tax, which would not have been the case had the money been held in an ISA.
#3: Becoming a higher rate taxpayer
Basic rate taxpayers will benefit from a £1,000 personal savings allowance, which will be cut to £500 for a higher rate taxpayer.
As your earnings rise you could end up paying tax on your savings interest which you wouldn’t have to pay if the money was held in an ISA.
#4: Tax-free interest after death
In his 2014 Autumn Statement the Chancellor announced that widows and widowers will be able to inherit the money held in their spouse’s ISA and maintain the tax-efficiency.
The personal savings allowance is not transferable in the same way, which means holding money outside of an ISA could see your widow or widower pay more tax than is necessary.
#5: Move from savings to investments
Money held in a Cash ISA can easily be transferred into a stocks and shares investment if the need arises.
This will mean tax-efficient returns from the stocks and shares investment, whereas the personal savings allowance only applies to money held in bank and building society accounts.
Do the maths
There is of course the problem of dual pricing; with most banks and building societies offering different rates for ISA and non-ISA accounts.
Time will tell whether banks and building societies use the introduction of the personal savings allowance as an excuse to cut interest rates on their savings accounts.
In the meantime you will need to do some maths to work out whether the interest rate offered by a traditional savings account, combined with the personal savings allowance, is a better option than a Cash ISA.
Once you have then compared the interest rates you then need to consider the other factors we’ve outlined here, before you make your decision.
We’re here to help
Are you confused about where to hold your savings?
Our team of advisers are here to help, call us today on 0115 933 8433, alternatively email info@investmentsense.co.uk
Please note: The Financial Conduct Authority does not regulate Cash ISAs
