George Osborne’s sixth Budget as Chancellor was relatively light on incentives for savers and investors, but there were some highlights worth mentioning. These include a new “Lifetime” ISA for the under-40s, with the government paying an effective 25% interest on a maximum of £4,000 a year, and a rise in the annual standard ISA allowance to £20,000 from 2017.
Despite the increase in the cash ISA allowance there is a strong argument that as a savings vehicle they are almost redundant. Here are 2 reasons why:
– rates offered on cash ISAs are currently at an all time low.
Recent figures from the Bank of England show that the average rate for a one year fixed cash ISA is just 1.17%, with easy access ISAs offering 0.85%. In contrast, RCI Bank is currently offering a standard easy access account with unlimited payments and no withdrawal penalties at 1.55%. For a basic rate taxpayer £20,000 deposited in RCI would return £249.41 in interest (after tax), compared to £170.66 from the average easy access ISA.
– from 6th April UK savers will enjoy an additional boon – the personal savings allowance.
This new incentive will enable lower rate tax payers to earn £1,000 of interest a year (and £500 for higher rate payers) on their savings. Taking the RCI interest rate of 1.55% as an example, this means that lower rate tax payers would have to have savings of around £64,500 to enjoy the full tax benefit (£32,250 for higher rate tax payers). With the average savings of a UK citizen being much lower than these levels we see the personal savings allowance making cash ISAs effectively redundant until interest rates rise back to more “normal” levels.
Of course ISAs have longer terms benefits – they will be very useful when interest rates eventually rise from their record lows. But with bank base rates still looking at least a year away from being hiked savers should be earning low rates of interest for some time yet. Interestingly, that may be a good thing for the crowdfunding industry.
We are now just weeks away from the launch of the Innovative Finance ISA (IF-ISA). This new product will enable savers to hold up to £15,240 in peer-to-peer loans, within a tax efficient wrapper. Although product launches are still in their early stages, we expect the interest rates on offer to be between 4% – 9% depending on their level of risk. So given the record low rates for traditional cash ISAs we expect a huge influx of funds into IF-ISA products.
Of course, investors should be aware that their capital is at risk, peer-to-peer loans are more risky than cash ISAs and that they are not backed by the Financial Services Compensation Scheme.