With less than a month to go until the end of the end of the tax year, the Isa season is in full swing.
The battle for savers’ cash is heating up, with many banks unveiling their best deals in recent weeks.
The leading rates on cash Isas this year are around 3.3 per cent for instant access, rising to 3.5 per cent fixed for two years and 4.5 per cent or more for savers willing to lock away their savings for four years or more.
But with inflation running at 4 per cent, savers who put their money in cash are almost certainly seeing its value erode.
Fair Investment Company savings analyst Julie Smith says basic-rate taxpayers with their money in a standard savings account have to be earning at least 5 per cent to stay ahead of inflation, while higher-rate taxpayers need to be achieving 6.67 per cent outside an Isa Smith says: “Even in an Isa, you need to be earning 4.00 per cent for your money to simply maintain its value.”
Figures from Fidelity show this is not lost on investors. A recent survey carried out by the company showed that 86 per cent of savers are now looking for a new home for their money as cash savings are so low.
But while the Isa is widely seen as a successful savings vehicle, with £45bn shielded from UK tax in the 2009/10 tax year alone, the majority of this is in cash and the take- up of stocks and shares Isas has lagged behind.
The research from Fidelity suggests that 67 per cent of people have never considered opening a stocks and shares Isa. This is backed up by statistics from HM Revenue & Customs which show that, out of 14.9 million Isa accounts subscribed to in 2009/10, only three million were stocks and shares Isas with the rest, 11.9 million, cash Isas.
Smith says: “Almost 40 per cent of taxpayers have a cash Isa but less than 10 per cent have a stocks and shares Isa and, considering you can only use up to half of your full £10,200 allowance in a cash Isa but can invest the whole amount in stocks and shares, savers are wasting a great deal of money on potentially unnecessary tax payments.”
Some people might rightly consider that stockmarket investments are not appropriate for their aims, many savers from all parts of the wealth spectrum are overlooking potential tax savings.
Smith says many savers cannot afford to save the full investment allowance but there are significant numbers of very wealthy savers who are overlooking Isas because they consider the annual allowance relatively small and not worth bothering with on a one-off basis. She points out that the potential shielding effect of fully using the annual allowance quickly builds up.
Assuming an individual has made full use of their annual allowance since the launch of the Isa in 1997 and assuming 7 per cent growth every year, a saver could have an Isa pot worth almost £137,000. As a married couple each has a separate allowance, a couple could have accumulated savings worth £275,000.
Smith says: “When you look at the tax advantages on an Isa for a single tax year, they may not seem worth it. But when you look at how much you could gain if you invest into an Isa year after year, it suddenly becomes very appealing.”
The need to protect investments from tax has become even more pressing this year, with the VAT increase in January and new pension tax relief rules and new higher rates of income tax coming into effect from April.
Fidelity International head of platform sales Julian Webb says: “Most significantly this year, the Isa is more valuable than ever before. Taxes are higher and rising and we encourage advisers to ensure their clients make the most of their tax breaks and do not give their Isa allowances to the taxman.”