Savers losing out on tax free benefits by not investing their allowance

News - Savings

Written by Ray Clancy

Tuesday, 16 February 2010 09:13

A large number of tax payers in the UK can’t be bothered to save, can’t afford to save or just don’t understand how to take advantage of tax free allowances, it is claimed.

In particular there seems to be antipathy towards ISAs with four out of ten people saying they are not planning to use their allowance for the current tax year that ends next month.

The research from moneysupermarekt.com also shows that 24% don’t understand what an ISA is and 26% saying that they just can’t be bothered.

For those who have decided to invest the vast majority, 70%, have opted to invest in cash ISAs only, with 19% opting for a combination of stocks and shares ISAs. The remainder, 11%, have split their allowance between cash and stocks and shares.

With a flat, low Base Rate over the past 12 months it has been tough for savers and the outlook for 2010 is not much better, especially with a rise in inflation which erodes the real return on savings.

But experts point out that for UK tax payers, ISAs are a useful tool to make their savings work harder for them, although savers have to be savvy and shop around for the best deal.

‘If you are a UK taxpayer it makes total sense to utilise your tax allowance so you can make your savings work harder for you. If you are a higher rate tax payer then it is even more important and with the new 50% tax bracket coming into force from 6 April there will be many consumers who will be looking to review their finances to protect against taxation,’ explained Kevin Mountford, head of banking at moneysupermarket.com.

The ISA allowance for under 50s is increasing to £5,100 from 6 April giving a greater incentive for tax paying savers. Savers who have funds in older ISA accounts should in most cases be able to transfer these funds to their new ISA without losing the tax free status. ‘With many older ISA accounts now paying a pittance it is important to transfer your funds to make the most of this pot,’ said Mountford.

‘A lot of people are put off investing in ISAs as they do not fully understand them or think they are overly complicated. The abolishment of the mini and maxi distinction will have gone some way to rectify this but clearly there’s still some work to be done in educating savers,’ he added.

The survey also showed that 14% are waiting for the best deals which are traditionally found towards the end of the financial year. Analysis has shown that 2010’s first wave of cash ISA offerings have been disappointing so far. ‘We have yet to see the ISA season start in earnest as there has been little movement in the best buy tables so far this year. Those consumers who adopt a wait and see approach may well be in a better position to secure the best deals,’ said Mountford.