The end of the cash ISA?
The new tax-free savings allowance will effectively spell the end of one of the most convenient tax havens, the cash ISA.
Chancellor George Osborne revealed plans for the tax-free savings allowance on up to £1000 in bank accounts in April. In doing so, he effectively removed the incentive for tax-free cash ISAs in most cases.
Since the announcement, the banks have been forced into radical action to keep customers interested and have slashed the charges by 40% as the general public has simply lost interest in these financial vehicles. It hasn’t helped as the cash ISA is largely returning lower amounts than accounts with instant access.
Several providers, including Santander RBS/Natwest have reduced their ISA offerings and abandoned the concept of a flexible ISA. The idea of allowing people to take money out of the ISA and then put money back in during the same tax year have now been abandoned.
Despite the government effectively giving the green light, the banks themselves have now decided to renege on this promise. For more than 4.5 million savers, who have a combined total of more than £266 billion into the accounts since they came into existence in 1999. Last year there were more than 10 million ISAs registered, but the incentive to take out new ones has taken a serious hit.
What was once considered the safest and best savings option has suddenly become a potential irrelevance. With so many savers locked in to long term plans now, the Chancellor’s latest initiative could leave a lot of savers effectively hamstrung, with money locked away that would have given them similar, if not better, returns, along with the benefits of instant access.
The banking system also benefits from ISAs, as the long-term capital they provide is a near necessity in the modern age. So the banking system itself will have to come up with a riposte for Osborne’s latest move.
Susan Hannums, director at savings adviser Savings Champion, said: “Providers have lost interest in Cash ISAs and rates have dropped like a stone, so the savers will obviously ask: ‘What’s the point?’”
The new rules come into force on April 6th, which means from that date any taxpayer on the basic rate can avoid tax on the first £1000 of interest they receive into a taxable account. Higher rate taxpayers receive an exemption on the first £500.
Those margins mean that the Cash ISA effectively loses its appeal and from April the providers expect that the general public will simply stop investing in the schemes at that point.
Of course the banking industry needs to offer a long-term investment solution. So the race is on to create a new package that will encourage savers to lock up substantial amounts of money for up to 10 years. For that to happen, the banks will have to come up with a new solution, which could encourage higher interest rates that will bring the savers back and give them a substantial yield on their savings accounts, rather than just protection from the taxman.
Time will tell.