New research highlights that more than two fifths (43%) of Brits feel there is no point saving in an ISA when you fall under the tax-free Personal Savings Allowance.
Almost one in five (18%) people aware of ISAs wrongly believe that once you have opened an ISA, you can’t transfer them to another provider.
With the end of the financial year approaching the Yorkshire looks at whether cash ISAs are still relevant.
Traditionally as the end of the financial year approaches, it is a time when savers take the final opportunity to top up their annual ISA limit and start thinking about their financial plans for the year ahead.
However with UK interest rates still at the historic low of 0.10% and meaningful returns on cash savings increasingly difficult to find, Yorkshire Building Society has conducted research into whether cash ISAs are still relevant and if savers fully understand the tax-free savings account.
Figures[i] released by the Society revealed a third (32%) of those surveyed held a cash ISA, yet two fifths (43%) felt there was no point saving in an ISA when you fall under the tax-free Personal Savings Allowance. The average ISA subscription in the 2018/19 tax year was down 6% on the previous year at £6049[ii].
The research also shows that despite two thirds (63%) saying they have a full understanding of the ISA rules, one in three (33%) Brits still think that once they have put money into an ISA they can’t take it out without losing their yearly allowance. This rises to two thirds (66%) when including those who weren’t sure if withdrawals would affect their allowance.
Finally, almost one in five (18%) of those who said they were aware of ISAs also believed that once they had opened an ISA, they couldn’t transfer their savings to another provider.
ISAs were originally developed to create a safe place to keep savings where the taxman couldn’t eat away at the interest. With the introduction of the personal savings allowance in 2016 also doing this too, some may question the relevance of ISAs. However, it should be considered that although basic rate taxpayers receive a tax-free allowance of £1,000, (higher-rate taxpayers can earn £500), a future rise in income or interest rates could affect this.
The increased flexibility of ISAs means they are highly beneficial as they are like any other regular savings accounts. There is no need to lock cash away for extended periods of time to receive the benefits as the money can be withdrawn at any time.
A tax-free ISA account also allows savers to take advantage of compound interest over a longer period of time. As the cash pot builds up over time, savers can benefit from tax-free interest on interest already earned.
Tina Hughes, director of savings at Yorkshire Building Society, said:
As our research has shown, the public’s knowledge of ISAs highlights that more than twenty years after they launched, there is still a lack of understanding when it comes to tax-free savings accounts. It’s important that we help people to save and build up their financial resilience at the same time as supporting and developing their understanding on things like tax-free savings.
It’s not a question of one or the other; ISAs remain an important product for many members, as interest from a cash ISA doesn’t count towards your Personal Savings Allowance, so it remains a tax efficient way to save for the short or long term. Shrewd savers could use both savings vehicles and consider making an ISA account their first port of call as it may offer better rewards over the long term – especially if rates rise. Savers can then make the most of their PSA if they are able to make any additional savings that year.
Four reasons savers should make use of their tax-free allowance each year:
Access your money when you need it Thanks to the introduction of flexible ISA rules in 2016, some providers – such as Yorkshire Building Society - allow you to withdraw some of your ISA and top it back up again within the ISA year, providing you don’t go over the £20,000 allowance.
Year-on-year savings add up! You can save £20,000 a year tax-free in an ISA, and add another £20,000 (or whatever the ISA allowance is for future years) to the same pot every year to come. As it compounds this helps your pot grow year-on-year.
Start saving from as little as a pound ISAs aren’t just for the wealthy and there’s no requirement to use all of your ISA allowance every year. Some providers let you open an account with as little as a pound and you can start to build a healthy savings habit while making use of your tax-free allowance.
ISAs are separate to your personal savings allowance Basic-rate tax payers can earn £1,000 savings interest a year in savings accounts without paying tax (higher-rate taxpayers can earn £500) but any interest earned on your ISA doesn’t count towards this allowance. It also lets you enjoy the effects of compound interest tax-free which makes it efficient for long-term saving. If you’ve got a lot of savings it’s worth having an ISA in addition to your personal savings allowance.
[i] Financial Unknown research was carried out by Opinium Research on behalf of Yorkshire Building Society. All surveys were conducted between 4th December 2020 and 8th December 2020 and the sample comprised 2,000 UK adults.
[ii] HMRC data - Individual Savings Account (ISA) Statistics, June 2020