Public frustration over savings rates is not likely to change any time soon, with the 45th consecutive month of a historically low 0.5 per cent Bank Base Rate announced by the MPC this week.
This “lower for longer” bank rate environment has inevitably had an impact on savings rates which, coupled with other pressures, is understandably doing little to encourage those who are able, to save, and has been a big issue for those who rely on their savings for income. Savers are suffering the effects of a perfect storm right now.
Currently, savers need all the help they can get. Legitimately avoiding paying tax on savings account interest is a no-brainer, making the Isa an obvious product for all taxpayers.
The Individual savings account has been a conspicuous success and has proved popular with those on lower incomes as well as those with more money to save: 60 per cent of those subscribing to a cash ISA in 2009/10 (the latest year for which HMRC data is available) had an annual income of less than £20,000 and 78 per cent had an income of less than £30,000. Building societies and other mutuals currently have 31 per cent of the cash ISA market with around eight million accounts – well above their circa 20 per cent market share for savings as a whole.
But there is a need to make Isas simpler, fairer and more equitable.
As they stand, Isa rules stipulate that whereas the full £11,520 allowance can be held in stocks and shares, only half the allowance may be held in cash. This means that savers who don’t want to risk the ups and downs of the stock market effectively have their tax-free Isa allowance halved – down to £5,760 each year.
In addition, and of particular importance to those at or nearing retirement, Isa transfers can only operate in one direction – from a cash Isa to a stocks and shares Isa. Those looking to limit their exposure to the volatility of the stock-market don’t have the option to move their money back into cash – unless they are a child with a Junior Isa, where for some reason it is permitted.
Additional statistics from HMRC show that in 2009/10 79 per cent of Isa savers aged 65 or above chose to use a cash ISA rather than stocks and shares (or both), compared to 72 per cent in the 45-54yrs age bracket. This indicates that more of those near or in retirement value the certainty of cash. This behaviour suggests that if they weren’t constrained, some older savers might appreciate being able to transfer from stocks and shares into cash. At present, they would have to take this money out of the Isa wrapper and use their current year cash Isa subscription.
Our view has long been that these rules are perverse, unfair and in the current environment unhelpful to savers. We are disappointed the chancellor has once again not taken the opportunity to do something comparatively minor, but constructive for prudent savers. Yes, there would be a cost to the Exchequer, but it would be relatively modest. If, for example £1 in every £10 in stocks and shares was switched (probably an overestimate) we estimate this would cost the Exchequer around another 5 per cent of the current total cost of Isas and a similar figure if 100 per cent of the Isa allowance were to be open to cash.
We are pleased that the Isa allowance was raised in line with inflation but we will continue to lobby the Government until we are satisfied that the needs of savers are met.
Hilary Mcvitty is head of external affairs at the BSA