ISA allowance changes welcomed but experts point out actual increase is tiny

News - Savings

Written by Ray Clancy

Thursday, 25 March 2010 09:59

The announcement yesterday that the annual ISA limit for UK savers is to be index linked to inflation from April next year has been broadly welcomed although some experts are warning it could be more confusing and the actual increase will be very small.

Even although inflation is currently low it will future proof the allowance, according to Brian Brown, head of research at independent financial research company Defaqto. ‘It will negate the possibility of the annual allowance value being eroded by stealth,' he added.

Ian Sayers, director general of the Association of Investment Companies, pointed out that ISAs are a successful way to encourage long term saving but said that the system could be more user friendly. For example, announcing the new annual ISA limits as early as possible would allow ISA providers sufficient time to prepare for the new tax year.

‘This is a good announcement coming off the back of the increase in ISA limits this year, and over the coming years will give savers the potential to put aside a significant tax efficient nest egg. The first savings or investment product that any tax-payer should consider is an ISA, to make the most of the tax efficient allowances,’ said David Wells, HSBC Head of Investments, Savings and Pensions.

Ian Trevers, Head of Distribution at Invesco Perpetual described it as ‘a bold step’ that will encourage people to save for the long term. ‘ISA allowances have remained static for too long and at last savers and investors have something to be glad about. With an election on the horizon I sincerely hope that any future government will prioritise savers’ needs and carry out this pledge,’ he added.

But not everyone is convinced it will make much difference. Recently surveys have shown that a large number of potential savers don’t invest in an ISA because they either don’t understand the benefits or can’t afford to invest.

‘This is nothing new. The announcement that the ISA allowance will increase each year inline with inflation is unlikely to make any real difference,’ said Nick Scarrett of the Fair Investment Company.

And Andrew Hagger of Moneynet.co.uk described it as ‘a token gesture’ that is likely to cost providers more to administer than it will actually deliver to beleaguered savers and it doesn’t make it any easier for the public to understand.

Indeed he said he has worked out that the tax free benefit will amount to less than a pound. ‘If you were to put your extra £127.50 allowance in an ISA paying 3% you would earn an extra £3.83 in interest as opposed to a normal savings account paying 3%, where you would receive a net return of £3.06. So the tax free benefit for a full year would amount to 76 pence,’ he explained.

‘A more useful option to give savers a real break would have been to allow the full £10,200 limit to be used in a Cash ISA, even if it was just a temporary measure for a year or two until traditional savings returns begin to recover from their record lows,’ he added.

Kevin Mountford, head of banking at moneysupermarket.com, agreed that the increase will be very small year-on-year so the incentive to save this extra amount is limited.

And Alan Easter, Director of discount broker Willis Owen, said there is a danger that raising the allowance by a small amount every year will cause confusion for consumers. ‘It will also cause difficulties for those consumers who invest on a monthly basis who would have to alter the direct debit payments,’ he added.