Talk Money Week – The Importance of ISA’s
In early April 1999, the then Labour chancellor, Gordon Brown introduced individual savings accounts (ISAs), which were designed to encourage more people to save their money. With a limit of £7,000, they replaced the successful Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) schemes.
With over 27 million adults holding an ISA totalling over £700 billion of savings, ISAs are one of the most popular financial products in the UK. They have become such an important financial tool that in 2017, the government increased their limit to £20,000.
ISAs have developed a significant amount since their introduction. When they were first launched, only adults could open them, and they would only hold cash, stocks, and shares. However, we now have a range of different schemes available including:
- Flexible ISAs – allows withdrawal and re-depositing in the same tax year
- JISAs – Junior ISAs, available to anyone under 18 with a limit of £4,260
- LISAs – Lifetime ISAs, available to people between 18-40. They have a subscription limit of £4,000, and receive a 25% bonus from the government
- Help to Buy ISA – available to UK first-time home buyers who can apply for a government bonus of up to £3,000
- Innovative Finance ISA – act as a tax-free wrapper on savings income from peer-to-peer lending.
ISAs are one of the most successful financial products available to the UK retail consumer, and especially for higher-rate taxpayers, it is easy to see why. When ISAs were first introduced in 1999, approximately 4% of UK adults paid a higher rate of tax; this figure is now 11% and is set to rise to 14% (1 in 7 adults) in the next few years[1].
With the average interest rate on savings accounts now over 5%, the difference in return between holding a savings account inside and outside an ISA is stark.
On a fund of £20,000, the difference in return for a higher-rate taxpayer is an annual return of £1,000 on the ISA or just £600 on a taxable account. Roll this up over 5 years, and the total return for the ISA investor would be £5,525, while the non-ISA investor would have received just £3,185.
This year’s theme of Talk Money Week is to do one thing, and my recommendation would be that if you have any money in ISAs, review them and make sure you are earning the best rate available. If you don’t have money in an ISA, start saving!
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[1]A deepening freeze: more adults than ever are paying higher-rate tax | Institute for Fiscal Studies (ifs.org.uk)
