First fall in ISA stash linked to low rates

The amount of money Britons stash in tax-free Individual Savings Accounts has fallen – albeit marginally - for the first time ever, largely due to less investment in cash ISAs.

In fact, total new subscriptions into ISAs in 2011-12 dropped to £53.3billion, down from £53.7billion the previous year, according to accountancy firm UHY Hacker Young.

Although the drop is only slight, it could mark a “turning point” in the “rapid growth” in savers’ use of such tax-free and “easily understood” accounts, said the firm’s Mark Giddens.

“The decline in the amount of money being saved is a big concern, as the government is keen to increase the level of savings,” he explained.

“Low interest rates are already making many cash ISAs almost worthless to savers, as savings are being eroded by inflation.”

The decline in ISA investment, which was driven by a fall in the sums put into cash ISAs, is indeed widely seen as a likely result of banks’ and building societies’ savings rates being at an all-time low.

But ContractorMoney, an independent financial adviser to contractors, last night reassured that NS&I, the state-run savings institution, is still paying some of the best ISA rates available.

In particular, the IFA outlined, the NS&I Direct ISA pays 2.25% tax-free – and the institution plans to improve the rate on its cash ISA to 2.25% later this month, up from 0.5% currently.

The adviser added: “Although the national stash of money in tax-efficient ISAs might no longer be increasing, these accounts will continue to let contractors benefit from any growth on the investment rather than them having to face the tax charges associated with traditional savings accounts.

“So ISAs will keep working well for contractors, especially alongside a pension to ensure these workers have a long-term savings plan, as well as easy-access to cash if required in the short-term.”

Asked about the dip in cash ISAs, ContractorMoney’s Tony Harris said he has previously recommended to contractors that they may wish to invest into a stocks and shares ISA, as such accounts tend to offer the highest returns in the long-term.

“This is especially true at the moment as interest rates are [very low] so returns on cash ISAs will be relatively small in the short-term,” he said. “However, it is important to bear in mind that the value of an equity-based ISA can fluctuate”.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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