Less money saved in ISAs
FOR many years savers looking to grow their money while enjoying the benefit of tax free interest have seen the Individual Savings Account (ISA) as the go-to destination. However, new figures released by HMRC show there has been a sea change in people’s saving habits, with new money deposits into cash ISA accounts falling by a third yearon-year. Just £39.2bn was deposited during the 2016-2017 financial year, a sharp fall from the previous year’s figure of £58.7bn, despite the favourable tax status, both in terms of income and capital gains. The reasons behind this are likely to be multifaceted, but the sharp fall matches a decline in household savings in general, not just ISAs. The Office for National Statistics said that just 1.7% of household income was put into savings in the first quarter of 2017. Poor savings rates compounded by inflation at 2.6% are likely to be one of the main driving forces behind the decline in contributions, with many people looking elsewhere to secure a return on their cash. In addition to this, since April 2016 the first £1,000 of savings interest is now automatically tax free which further reduces the appeal of an ISA for most people. What all this means is that people are either willing to or being forced to take more risk to achieve a real rate of return on their capital and beat the historically low interest rates which have been imposed on savers for some time. This can mean greater exposure to the stock market with a stocks and shares ISA or investing in new, innovative products such as peer-to-peer lending. It’s worth highlighting that there are other factors that might be reducing the amount we save as well. Many people are still feeling the effects of the financial crisis, particularly in their pay packets. This has the knock-on effect of reducing people’s disposable income meaning more of their cash is spent on essentials each month, rather than being put into savings. Rising house prices which have not been matched by salary increases could also be having a significant impact, particularly among older savers who are increasingly finding themselves acting as the Bank of Mum and Dad. Instead of putting their cash into the bank, parents are often helping their children get on the property ladder, either by buying a property for them to live in or giving/loaning them the money to enable them to purchase their first home. For most people it’s a bitter pill to swallow to think that you’ve worked hard to save money into a cash ISA only for banks and building societies to ‘take advantage’ of you by giving you virtually no return on your money. After all, tax free nothing is still nothing.
Andy lives in Wokingham and has worked as a financial adviser for over 30 years. He is married with three grown-up children. Faron Partnership offers personal financial advice, including retirement, investment and estate planning. Any information or views expressed in this article should only be acted upon within the context of your own circumstances with the help and guidance of a professional financial adviser. Faron Partnership Ltd is an independent financial adviser which is an appointed representative of ValidPath Ltd which is authorised and regulated by the Financial Conduct Authority.