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By Sarah Modlock
It's now abundantly clear if it wasn't before that the chancellor has absolutely no desire to see us saving more. He made it quite clear with his one-trick ISA limit increase that spending - not saving - is king in a recession. Let's look at the evidence. The annual limit for ISAs will rise for over-50s from 6th October this year and for everyone else from 6th April next year. Limits will be raised from £7,200 to £10,200 for stocks and shares ISAs and the amount that can be put in cash ISAs each year will be increased from £3,600 to £5,100. On the face of it, this should be good news for approximately 18million ISA savers. But the 'surprise' Budget fanfare obscures the sad reality that this is only the second time the limit has been raised since ISAs were introduced 10 years ago; the overall ISA limit was raised to £7,200 from £7,000 last year. So the chancellor is not only playing catch-up with ISA limits, he's still way behind on delivering the kind of tax-free savings breaks we should be getting. Of course at the moment any increases won't mean much while we have a struggling stockmarket and low interest rates. A year ago people were getting up to 7% interest on their savings. Today the average ISA account pays just 2%, with many high street banks and building societies paying less than 1% on savings. Even greater reason to do more for savers rather than less. Will this increase help? Most experts agree that this is better than nothing and may encourage people to save. "With interest rates at an all time low it's vital that savers don't lose sight of the benefit of saving and more importantly the long term benefits of holding their money within an ISA," says Reza Attar-Zadeh, Director of Savings and Investments from Abbey and Alliance & Leicester. "With over 31 million taxpayers in the UK, now, potentially an extra £95.1billion could be saved, tax efficiently," he adds. "Our research showed that of 43% of savers who do not currently have an ISA and just one in seven are planning to open one in the next year. Today's announcement makes the case for ISAs even more compelling. Now, hopefully this change will go some way to inspire people to get back into the savings habit. This simple truth is, in an environment where every penny counts, for any taxpayer looking to save a tax-free ISA is a no-brainer. With an interest rate of 3.5% AER on our Reward ISA, a lower rate tax payer would have to find a standard savings account paying 4.37% to earn the same annual return." Elsewhere, the Post Office believes that the increase is what savers have been waiting for and has figures which show that over a third want to save more in an ISA, even if they cannot make use of the full allowance. But it also found that more than half of savers had no idea what the current limits were. "Today's announcement is an encouragement to people that it is worth saving," says Richard Norman, head of savings at the Post Office. "Although it might be tough to put money away at the moment, it's more important than ever to make sure your savings work as hard as they can for you. This means taking advantage of any tax breaks that are available both now and in the future." Meanwhile, a study by Scottish Widows reveals that the simplicity of ISAs remains a selling-point for savers. More than half of savers who already have a cash or equity ISA stated the reason they chose it because of the relative transparency - you can see exactly what return you have made on your hard earned cash. "Everyone who is able to put some money away should be taking advantage of their ISA allowance in 2009 - it's tax-free, simple, and an ideal place to start saving for the future, even if you haven't managed this in the past, " advises Gordon Greig, head of savings and investments at Scottish Widows. Why not let pensioners put it all in cash ISAs? The Budget geared the ISA changes to the over-50s but was it enough? Andrew Hagger of Moneynet.co.uk says "The increase of the ISA allowance to £10,200 will offer savers a smidgen of better news although I'm sure that many will have welcomed a more flexible option where they could have invested the full £10,200 in cash." He points out that the stock market is a far from ideal savings home for the elderly who seek absolute security of their capital. In fact the recent volatility of the markets will ensure that many will continue to give equities a wide berth. "As the Chancellor has already offered this increase a year earlier for over 50's, it was a missed opportunity to introduce another age related variance with ISAs rules enabling pensioners to take the full £10,200 allowance as a cash option," he says. The future for ISAs Having called on the Chancellor to raise the ISA limit, Nationwide Building Society also wants to see further improvements made that will help engage consumers about the importance of saving. Crucially, it wants the government to ensure the ISA subscription rate is linked to the annual rate of inflation to ensure it maintains its true value - something which I believe would get universal support from just about every quarter except the Treasury. It would also like the rules to allow people to withdraw from and replenish their ISAs within a single tax year up to the maximum annual limit. Nationwide says the cash ISA limit should be increased to match the stocks and shares limit, giving consumers greater choice over how their savings are invested. The £5,100 limit for cash ISA holders is disappointing as it restricts consumer choice. It is also calling for the creation of a single annual limit which, if not used in full, could be rolled over to subsequent tax years. These are simple, and frankly, obvious changes which would have a real impact on our saving habits. Gold star for Nationwide. Darling, stay behind after school. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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