If you hadn’t noticed, we’re in the thick of Isa season. My inbox is awash with press releases on the latest stocks and shares Isa investment opportunities, the markets that are looking hot in 2018 and the rest of the fervour from investment companies trying to get a hand on your savings.
And there’s been a glut of new “innovative finance Isas”, which see you lending money to people and businesses who want to borrow in return for interest rates which can top, in the riskiest areas, a staggering 16 per cent a year.
On the flip-side, I’ve had next to nothing on cash Isas. Indeed, is there any real point cash Isas at the moment?
From a tax-saving perspective, Isas are no longer the no-brainer choice. With a plain-old savings account, basic-rate taxpayers can earn up to £1,000 a year in interest before they have to pay any income tax. That’s thanks to the Personal Savings Allowance, which was launched back in 2016 by then-Chancellor George Osborne.
And, despite an uptick in the Bank of England base rate, the deals on offer aren’t anything to write home about – particularly in the fixed-rate market, where Isas still pay inferior rates compared to their ordinary bond counterparts.
Of course, you can argue that both fiscal and monetary policy are responsible for the slow death of the cash Isa. But, at a time where low rates have caused anaemic interest in bog-standard cash products, Isa providers have not taken advantage of rule changes that can help them stay relevant and attractive.
This week, my colleague discovered that the vast majority of Isa companies are failing to offer “flexible” Isas. Did you even know what these are? You’re in good company – when we surveyed Which? members earlier this year, around four in ten had never heard of them. Flexible Isas allow you to withdraw money and replace it within the same tax year without affecting your annual allowance.
For example, if you added £5,000 to a flexible Isa within a single tax year, you would have £15,000 left of your annual Isa allowance to use. If you then withdrew £5,000, you would be able to put a further £20,000 before the end of that same tax year (the £5,000 withdrawn plus the remaining £15,000 of your annual allowance).
In a non-flexible Isa, you would only be able to replace up to £15,000, as the £5,000 withdrawal cannot be replaced without reducing your allowance for that tax year.
We’ve found that just 46 out of 146 “variable-rate” cash Isas – less than a third – let you take advantage of this flexibility.
That’s not all. In 2015, new rules were introduced to allow people to inherit the Isa savings of their spouse or civil partner and retain the tax-free benefits – known as the “additional permitted subscription”.
This was a huge boon for couples. Anyone whose spouse or civil partner died on or after 3 December 2014 is eligible for a one-off additional Isa allowance equivalent to the value of the deceased person’s Isa at the time of death.
Say, for example, you’d saved up £50,000 in your Isa before your death. Your spouse will be able to make an additional contribution to their Isa of up to £50,000, in addition to their own Isa allowance for the year (£20,000 in the 2018-19 tax year). This allowance is regardless of what’s in your will. Which means that even if the money is left for someone else to inherit, such as your son or daughter, your partner is still entitled to an increased allowance equivalent to the value of your Isa assets.
This is being souped-up even more. From 6 April 2018, new legislation means that all types of Isa (except the Junior Isa) will turn into a “continuing account of a deceased investor” or a “continuing Isa”, so that any growth remains tax-free.
Before this tweak to the rules, the additional allowance was frozen at the value of the deceased’s Isa at the time of death. This meant that any growth became taxable during the probate process, which can take months or even years depending on the complexity of the estate. From the new tax year onwards, this rule-change means that the APS allowance is equal to the value of the money passed on, or the value at death, whichever is higher.
Awareness of this valuable allowance is low – only 40 per cent of people in our survey had ever heard of it. And it’s no surprise, given that Isa providers aren’t obliged to accept this additional inherited allowance, and therefore, very few actually do. Only 61 of the 308 fixed and variable-rate cash Isas on the market will accept these kinds of transfers:
So, back to that question – are cash Isas still worth bothering with? With a base rate increase mooted for May, savings rates should get a corresponding bump. And higher-rate taxpayers can benefit from Isas as you can only earn up to £500 in savings interest before you have to start paying tax. You’d exceed this allowance if you had more than £27,000 saved in the best one-year bond that’s currently available (1.86 per cent), so would need to use an Isa to avoid paying 40 per cent income tax on the excess.
But if providers aren’t embracing the new benefits that make Isas more useful and relevant to people, these once-popular savings products are at risk of fading from their minds. Tax-free saving is a powerful tool for consumers – the savings industry should be doing everything it can to help people recognise that.
Gareth Shaw is head of Which? Money Online