The days of bank­ing on an Isa are over

Now that it’s eas­ier to com­pare re­turns with or­di­nary sav­ings ac­counts, Isas of­ten lag be­hind

The Scotsman - - SMART MONEY WITH JENNY ROSS -

Ac­tion is re­quired to tighten up mar­ket­ing. It’s un­ac­cept­able that savers could be pun­ished for tak­ing risks they weren’t even aware of.

It’s only just reached its 20th birth­day, yet the dar­ling of the sav­ings world is look­ing de­cid­edly washed up.

Isas were in­tro­duced in 1999, re­plac­ing tax- ex­empt spe­cial sav­ings ac­counts ( Tes­sas) and per­sonal eq­uity plans ( Peps). The orig­i­nal cash Isa al­lowance stood at £ 3,000, but you can now save up to £ 20,000 each year. The cash Isa’s taxfree sta­tus meant it be­came a firm favourite among savers, with sub­scrip­tions peak­ing at 12.2 mil­lion in 2008- 09.

But it’s since lost its sparkle. The lat­est data from HMRC re­veals that just 7.8m ac­counts were opened dur­ing the 201718 tax year – a drop of nearly 700,000 com­pared to 2016- 17. This marks the sec­ond year in a row that cash Isa sub­scrip­tions have fallen dra­mat­i­cally.

So what’s prompted savers’ change of heart? It’s no co­in­ci­dence that the first marked drop- off in sub­scrip­tions was seen in the 2016- 17 tax year – that’s when a change in tax rules put or­di­nary sav­ings ac­counts on level peg­ging with cash Isas.

Be­fore April 2016, a cash Isa was the only way to pro­tect your sav­ings from tax, but a ba­sic- rate tax­payer can now earn up to £ 1,000 in in­ter­est each year with­out pay­ing a penny to HMRC, while higher- rate tax­pay­ers can earn £ 500, re­gard­less of what type of ac­count you hold your sav­ings in.

Ac­cord­ing to the gov­ern­ment, th­ese rules – known as the per­sonal sav­ings al­lowance – mean that 95 per cent of savers don’t have any tax to pay on their nest eggs, wip­ing out the unique sell­ing point of an Isa in the process.

Now that most peo­ple don’t

have to worry about tax on sav­ings, it’s much eas­ier to com­pare Isas and or­di­nary sav­ings ac­counts – just look for the high­est head­line rate of in­ter­est. And when you do, you’ll see that Isas are of­ten lag­ging be­hind.

Savers to­day can only dream of the kind of re­turns on of­fer when Isas launched 1999 – the most gen­er­ous ac­counts back then paid a rate of 6.5 per cent. His­tor­i­cally, cash Isa rates eas­ily out­stripped those on or­di­nary sav­ings ac­counts.

If, in Jan­uary 2007, you had put £ 3,000 – the full al­lowance at the time – into an in­stan­ta­c­cess Isa pay­ing the aver­age rate ( 4.83 per cent), you would have earned £ 145 af­ter a year. The same in an or­di­nary sav­ings ac­count would have re­turned just £ 80 for ba­s­i­crate tax­pay­ers or £ 60 for higher- rate tax­pay­ers.

To­day, the dif­fer­ence be­tween the mar­ket- lead­ing in­stant- ac­cess Isa and in­stan­ta­c­cess sav­ings ac­count ( based on a £ 3,000 de­posit) would be less than £ 1 af­ter a year – and that’s in favour of the sav­ings ac­count, with t he Mar­cus ac­count from Goldman Sachs pay­ing 1.5 per cent, com­pared with Skip­ton Build­ing So­ci­ety’s Online Bonus Isa, which pays 1.48 per cent. It’s a sorr y re­flec­tion on the state of the sav­ings mar­ket that this in­stant- ac­cess ac­count pay­ing 1.5 per cent was such a talk­ing point when it launched a few months ago.

Back in 2013, I was lament­ing the fact that the best in­stan­ta­c­cess rate had fallen from 3.2 per cent to 2.1 per cent in the wake of the Fund­ing for Lend­ing Scheme, which was in­tro­duced in Au­gust 2012 with the aim of pro­vid­ing cheap fi­nance to banks to fund mort­gage lend­ing. The knock- on ef­fect was that banks be­gan mer­rily cut­ting sav­ings rates be­cause they were no longer as re­liant on cus­tomer de­posits.

Six years on, it’s clear that this was just the be­gin­ning of a long and bumpy ride for savers. To­day, you’ll have to be pre­pared to tie up your money for at least a year in a fixed- term ac­count to stand a chance of match­ing the 2.1 per cent re­turn that was avail­able on an in­stant- ac­cess ac­count in 2013.

So if you come across firms of­fer­ing bonds pay­ing more than dou­ble this, take care. The re­cent col­lapse of Lon­don Cap­i­tal and Fi­nance ( LCF) is a shock­ing cau­tion­ary tale.

Over the past few years we heard from many in­ter­ested savers who had seen their ad­verts for eye- catch­ing rates of up to 8 per cent – in some cases LCF’S prod­ucts were listed along­side or­di­nary cash sav­ings ac­counts on online com­par­i­son ta­bles.

But th­ese prod­ucts – known as mini- bonds – are in fact high- risk in­vest­ments; essen­tially a loan to a com­pany in re­turn for reg­u­lar in­ter­est pay­ments. In De­cem­ber 2018, the FCA or­dered LCF to with­draw its pro­mo­tional ma­te­rial be­cause of con­cerns that cus­tomers may not have been clear about the na­ture of the prod­ucts they were putting their money into.

Un­like sav­ings bonds, mini­bonds are not cov­ered by the Fi­nan­cial Ser­vices Com­pen­sa­tion Scheme ( FSCS), which can pro­tect you when fi­nan­cial firms fail. As a re­sult, the 11,000 peo­ple who put their sav­ings into LCF have been left out of pocket by £ 236m, with lit­tle hope of com­pen­sa­tion.

Shortly af­ter the F CA an­nounced last month that there would be an in­de­pen­dent re­view into LCF and the reg­u­la­tor’s han­dling of the firm, it is­sued a warn­ing about in­no­va­tive fi­nance Isas, which it says are be­ing pro­moted along­side cash Isas.

In­no­va­tive Fi­nance Is as al­low you to use your tax- free Isa al­lowance to in­vest in peerto- peer loans, but un­like cash Isas you may not be pro­tected by the FSCS if a firm were to col­lapse.

While the Isa has seen plenty of up­heaval in its two decades, it re­mains a trusted name. But as the range of prod­ucts that carr y this la­bel grows, and as savers in­creas­ingly look be­yond cash to find a mean­ing­ful re­turn, it seems more ac­tion is needed to tighten up mar­ket­ing and stop lines be­ing blurred be­tween prod­ucts that might ap­pear sim­i­lar but op­er­ate in very dif­fer­ent ways.

It’s un­ac­cept­able that savers could be pun­ished for tak­ing risks they weren’t even aware of.

0 A change in rules, al­low­ing ba­sic rate tax­pay­ers to earn up to £ 1,000 in in­ter­est with­out pay­ing tax, has made Isas less at­trac­tive

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