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What are the benefits of saving in an ISA?

07 September 2018
Louise Halliwell
Senior Savings Manager
Yorkshire Building Society

  • Saving in an ISA delivers unique tax benefits
  • You can save up to £20,000 tax free in an ISA annually, but there’s no limit to the total amount you can hold
  • An ISA also allows you to enjoy the effects of compound interest tax-free which makes it efficient for long-term saving
  • Most providers will allow you to transfer all of your ISA savings to them without it counting against your annual ISA saving allowance

An ISA has many benefits – it’s the most tax-efficient way a retail saver can deposit money and earn interest. Put your money in an ISA and none of your interest will be shared with the tax man. And if that’s not enough, consider this: an ISA has unique long-term tax advantages. All money remaining in an ISA, including returns, has ongoing tax-free status, enabling savers to build up a substantial savings pot in the most tax-efficient way.

Although you’re restricted to depositing £20,000 per tax year, this is a substantial allowance and there is no limit on the total amount you can hold in an ISA. This not only means you will enjoy the effects of compound interest tax-free, it also enables you to plan for the longer term. Most providers will allow you to transfer all of your ISA savings to them without it counting against your yearly deposit allowance.

Given all the benefits of an ISA, it’s concerning to see the popularity of this tax-efficient savings scheme is at its lowest level since the scheme began in 1999. According to figures from the Office of National Statistics, ISA numbers declined for the 10th year in a row. Total ISA numbers reduced by 10% to 10.8m[i] – the first time this figure has dropped below 11m in 17 years, leading some to question if we actually need the ISA any more.

If we look more closely at the figures, we can see that the biggest decline in popularity was the cash ISA. The total figure for the stocks and shares ISA actually increased 246,000, but the cash ISA figure fell by 697,000.[ii] This could perhaps be interpreted as a reflection of wider factors: the low Bank Rate, bullish stock market and the 2016 introduction of the Personal Savings Allowance, which enables basic tax payers to earn up to £1,000 in tax-free interest in any savings account.

However, while this could indicate people are simply finding alternatives to the ISA for their savings, the evidence would suggest otherwise. The household savings ratio - the proportion of disposable income which is saved - has fallen from 7.8% to 4.1% over the same time period, and is the lowest since 1963.[iii] This indicates people simply aren’t saving enough.

Although we clearly need to save more – and the ISA has an important role to play in this - it’s encouraging to see that those with an ISA are using it to better effect. Although the ISA has seen a drop in numbers, the amount of money people on average hold in their ISA is on the up. Last year, the stocks and shares ISA saw a year-on-year total increase in deposits of a whopping £6.3bn, while the cash ISA saw an increase in total value of £600m. This means the average balance per ISA now stands at £6,409 – more than at any time since the scheme began.[iv]

It’s great to see that those who understand the benefits of an ISA are using them more fully. That signals a clear endorsement for the ISA from advocates – but perhaps more people need to recognise how ISA saving can benefit them.

Tax year

ISA total

£ total

£ per ISA

1999-2000

9.27m

£28.4bn

£4,620

2009-2010

14.43m

£44.0bn

£3,046

2010-2011

15.25m

£53.7bn

£3,523

2011-2012

14.05m

£52.8bn

£3,756

2012-2013

14.61m

£57.4bn

£3,927

2013-2014

13.47m

£57.3bn

£4,250

2014-2015

12.99m

£83.2bn

£6,403

2015-2016

12.66m

£79.8bn

£6,307

2016-2017

11.07m

£61.6bn

£5,558

2017-2018

10.82m

£69.3bn

£6,409

 

 

For more information on how to get into good savings habits when using an ISA, visit out handy guide here.



[i] Individual Savings Account statistics, ONS, 31 August 2018.

[ii] Individual Savings Account statistics, ONS, 31 August 2018.

[iii] Households’ saving ratio, ONS, 28 June 2018.

[iv] Individual Savings Account statistics, ONS, 31 August 2018.

 

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