ISA outlook - are Britons ready for change?

03 March 2010 12:21:44

Many Britons are confused by ISA allowances.

Individual savings accounts (ISAs) have enjoyed a popularity boom since their launch in 1999 and figures show that 14.2m accounts were in operation in 2008/09. Research from Halifax indicates that the total amount saved in cash ISAs stood at £169.5bn in December 2009. But, with a recent change to the ISA allowance for over-50s and further changes around the corner for younger savers, many have been confused by the system.

ISA uptake on the rise

Britons' propensity to save took a knock at the start of the recession, but recent figures from Abbey Savings suggest that the situation is improving, with consumers now putting aside 21% more than at the start of 2009 and 44% of savers holding a cash ISA. The accounts enable taxpayers to make the most of their money, allowing them to save a certain amount without being taxed on the returns.

Britons are slowly but surely realising the benefits of comparing ISAs, with recent research by Friends Provident revealing that 43% of 21 to 29-year-olds intend to incorporate ISAs into their retirement planning. Meanwhile, the older generation has also been showing an increased interest in ISAs, particularly since chancellor Alistair Darling decided to increase the ISA limit to £10,200 for the over-50s. Virgin Money found that the move was followed by a 120% increase in lump sum contributions into share-based ISAs by older investors.

Changes to ISA allowances

For this tax year, the full ISA allowance is £7,200 for under-50s (up to £3,600 of which can be in a cash ISA) and up to £10,200 for over-50s. For the next tax year, everyone will be able to save and invest up to £10,200, a maximum of £5,100 of which can be in a cash ISA.

However, not everyone is aware of these allowances. A recent survey by the Co-operative Financial Services found that 76% of over-50s did not know their annual cash ISA allowance, while 22% wrongly thought they were only entitled to put away up to £1,800. Rod Bulmer, managing director of the organisation's retail division, claimed that while most over-50s understand the benefits of an ISA, "they are not fully aware of the level of ISA allowance".

Barclays' head of savings, Andy Gray, confirmed that many consumers are poorly informed about the changes to ISA allowances, revealing that research by the bank found as many as 42% of customers were unaware that new limits would be in place from April 6th 2010. Mr Gray described the widespread ignorance as "surprising" and urged savers to "review their savings to ensure they don't miss out on their tax-free allowance".

Millions lost in extra tax

This lack of awareness has undoubtedly contributed to Britons' failure to make the most of their full ISA allowances. Despite the clear benefits of utilising an ISA, research by Clydesdale & Yorkshire Banks indicates that savers have only invested around one-sixth of the amount that could have been put away in ISAs since their launch in 1999. This means that consumers have being paying unnecessary tax on their returns to the tune of £13bn over the years.

Still time to act

Taxpayers only have until the end of the tax year, April 5th 2010, to make the most of this year's ISA allowance, but this still leaves enough time to compare ISAs. John Prout, sales director at NS&I, claimed that the accounts are a "must-have" product for anyone hoping to maximise their savings. The director pointed out that savers need to understand their allowances and insisted that there is "no time like the present for everyone to check their finances and plan to benefit from tax-free savings".

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