Call to Axe ISAS

cepheus
cepheus Posts: 20,053 Forumite
edited 26 April 2011 at 4:40PM in ISAs & tax-free savings
I don't think it will happen whilst right wing governments prevail, but I can see their logic. Don't serve their stated purpose!

'Failed' Isas and should be axed just 11 years after they were introduced, a think tank has claimed.
Individual Savings Accounts, created in 1999, have failed to boost saving among low and middle income families, the Institute for Public Policy Research (IPPR) says.
Instead, richer savers who'd have squirelled away cash regardless have reaped the rewards of Isas' tax-free status........
Instead of Isas, the IPPR wants a new account that gives bonuses making saving more attractive to low-to-middle income earners.
Its 'Lifetime Bonus Savings Account' would see the Government pay a bonus into accounts on a sliding scale dependent on the average balance over the preceding three years.
For example, on the first £1,000, the government would pay £1 for every £10; on the second £1k, they'd get £1 for every £20; on the third £1k, savers would get £1 for every £30, and on anything above above £3,000, they would receive nothing......
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Comments

  • datostar
    datostar Posts: 1,287
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    If these 'low-to-middle income earners' either can't afford to or aren't inclined to save, how will a Government bribe change their ways when the carrot of tax free savings allegedly hasn't worked? I stress 'allegedly' because there has been a large uptake of ISAs, especially the cash variety. Obviously by the wrong people according to the IPPR.
  • cepheus
    cepheus Posts: 20,053 Forumite
    The lottery might have been a more attractive savings instrument for lower income people if designed like premium bonds, but with the hype of the national lottery.
  • Baldur
    Baldur Posts: 6,565 Forumite
    I seem to recall that the last scheme which was supposedly intended to target those on low incomes was scrapped by the present government last summer.


    <Edit> See http://www.bbc.co.uk/news/10376543
  • spikyone
    spikyone Posts: 454
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    The IPPR are clearly fools with little understanding of financial products. This idea is so bad I barely know where to begin laying into it. :mad:
    Individual Savings Accounts, created in 1999, have failed to boost saving among low and middle income families, the Institute for Public Policy Research (IPPR) says.

    Instead, richer savers who'd have squirelled away cash regardless have reaped the rewards of Isas' tax-free status........

    No kidding. Do you think that's because those on higher incomes have more disposable income?
    From the article:
    44% of families who earn less than £200 a week have no form of savings at all
    Where exactly are families earning that little money going to find anything to save? Over 75% of that money is likely to be going on keeping a roof over their head and paying heating/lighting/water/council tax. Frankly I can't believe it's as few as 44%, or that families on that kind of income can afford to eat.
    Also from the article:
    The IPPR would only allow four withdrawals a year before this bonus is lost. This would 'encourage people not just to save but also to retain savings in their account', it says.
    So, not only do you have to scrape some savings out of your £200/week, but you'll have limited access to anything you do save. People should not be encouraged to save into fixed-term accounts with such penalties unless they have some other form of savings that's instantly accessible without penalty. And according to the earlier passage, they don't.
    Putting restrictions on the account is going to put the target audience off anyway:
    Nick Pearce, IPPR director, said: 'Our research shows that people on low-to-middle incomes want simple savings accounts with few terms and conditions, little in the way of small print'
    If he had half a brain cell, he'd be dangerous. :T

    For example, on the first £1,000, the government would pay £1 for every £10; on the second £1k, they'd get £1 for every £20; on the third £1k, savers would get £1 for every £30, and on anything above above £3,000, they would receive nothing......

    Read that again, just to make sure you read it correctly. Yes, you did. The IPPR want to encourage saving by paying you no interest whatsoever on some of your money. Anyone with an ounce of financial savvy would simply put in enough to get an above-average return, then put the rest of their money elsewhere. This idiotic idea of diminishing returns will limit how much people save under the scheme.
  • cepheus
    cepheus Posts: 20,053 Forumite
    I think the idea is to encourage small savers, rather than supply a tax free savings account for the rich, but I think it would require more than that to be attractive.
  • spikyone
    spikyone Posts: 454
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    edited 27 April 2011 at 12:55PM
    cepheus wrote: »
    I think the idea is to encourage small savers, rather than supply a tax free savings account for the rich

    That's what it says. But it's still a deeply flawed idea that's destined to fail in that aim.

    - The "families" they are targeting have little or nothing to save.
    - If the "savings ratio" is going to decrease in future years*, people will be even less able to save, regardless of what the account is called or how it works.
    - The restrictions on withdrawals will put off the target audience (according to the IPPR!).
    - Fixed term accounts with penalties for withdrawal are not the best option for those with no other savings.
    - The system is more expensive than ISAs, yet the AER for someone with a balance of £3k is 2%, which is beatable in a standard instant access savings account even after tax. For someone with £1k it's 3.2%, exactly what you can get with an instant access ISA.
    - etc, etc, etc...

    Moreover ISAs were never specifically intended to encourage those on lower incomes to save whilst not helping the rich; you can put £10,680/yr into a stocks and shares ISA, of which nobody on a low income would dream. So it's hard to see why the IPPR has been - and I hesitate to say it - 'thinking' about this issue, or at least approaching it from this direction.

    Coming back to my earlier point(*), it's obvious that the "savings ratio" is going to decrease: high inflation + low wage increases + mortgage interest rates rising = less disposable income. Unless this can be re-balanced, all the incentives in the world won't help those on the lowest incomes to save. How that re-balance is achieved is a discussion for a different board entirely...
  • cepheus
    cepheus Posts: 20,053 Forumite
    edited 27 April 2011 at 1:21PM
    At the risk of stereotyping a little, many of these families seem to find enough money for lottery tickets, bingo etc.

    Due to benefits and zero tax, their effective income can be much higher. However, it is part of their culture not to save, but to gamble it away. I was wondering if something along the lines of Premium Bonds could be used as a saving/pension scheme instead.
  • dunstonh
    dunstonh Posts: 116,040
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    I think the idea is to encourage small savers, rather than supply a tax free savings account for the rich, but I think it would require more than that to be attractive.

    That was looked at before but failed.

    Originally, the cash ISA was not intended to be what it is now. It was not even meant to be sold by the banks. It was going to be a £1000 a year tax free allowance to be sold by supermarkets. The idea being that you would get your shopping bill and round it up with the extra going into your cash ISA.

    During consultation, the supermarkets decided the cost of technology and the ability of technology was not at a level that could make it viable. The banks were then approached but they said they could not make it profitable at £1000. So, the limit was initially set at £1000 but a limited period offering £3000 . The limited period became full time.

    Small savers are not profitable and unless we move to a communist state, then something that is not commercially viable does not make any sense.

    S&S ISAs make a lot of sense to the Govt. They only lose a relatively small amount on tax but it encourages investing across the board (and plenty of lower and medium net worth people use them). It also helps that the investments used support the economy allowing for tax to be collected via other means.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • cepheus
    cepheus Posts: 20,053 Forumite
    Small savers are not profitable

    Then why do banks offer childrens accounts and monthly saver accounts from say £10 a month?
  • dunstonh
    dunstonh Posts: 116,040
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    cepheus wrote: »
    Then why do banks offer childrens accounts and monthly saver accounts from say £10 a month?

    childrens accounts are only a tiny volume and are typically run by customers how are likely to have their own savings with the same bank.

    Nowhere near the volume of tax incentivised accounts
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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