MSE News: Savings rates dive, so what next for your cash?

edinburgher

and that the DISGRACE is that ISA rates are lower than standard rates.

I feel like I'm missing something :question:

The difference between the best 5 year taxed and ISA fixes is 0.01% (4.06% and 4.05%, respectively).

So, while the ISA pays a tiny bit less interest, isn't it still much better as you'd need over 5% interest on a comparable taxed account to match that?

oldvicar

edinburgher wrote: »

I feel like I'm missing something :question:

The difference between the best 5 year taxed and ISA fixes is 0.01% (4.06% and 4.05%, respectively).

So, while the ISA pays a tiny bit less interest, isn't it still much better as you'd need over 5% interest on a comparable taxed account to match that?

Fair point. But its the 5-year rates which are the exception proving the rule. Rates for 1,2,3 or 4 years are worse for ISAs.

I take all the points made by other posters about how dreadfully expensive the cumbersome ISA rules are to operate (although once again I say ISA money is 'stickier' so may not cost banks more overall).

It makes me think the fault is the government's, for inventing ISAs with so much red tape, rather than the banks.

The logical conclusion is that it is now time to stop the ISA scheme altogether. After all they were invented by a Labour government, not either of the coalition parties. Instead the current suggestions to make all savings interest tax free (or even just allow a certain amount of savings interest to be tax free) would be just fine for most people - although I can't quite see how the government can afford this just now.

grey_gym_sock

oldvicar wrote: »

The logical conclusion is that it is now time to stop the ISA scheme altogether. After all they were invented by a Labour government, not either of the coalition parties. Instead the current suggestions to make all savings interest tax free (or even just allow a certain amount of savings interest to be tax free) would be just fine for most people - although I can't quite see how the government can afford this just now.

just abolish ISAs and increase the personal allowance slightly (by enough that the changes are revenue-neutral).

the personal allowance is available for both earned and investment income. why should there be a special allowance only available for investment income?

Linton

oldvicar wrote: »

Fair point. But its the 5-year rates which are the exception proving the rule. Rates for 1,2,3 or 4 years are worse for ISAs.

I take all the points made by other posters about how dreadfully expensive the cumbersome ISA rules are to operate (although once again I say ISA money is 'stickier' so may not cost banks more overall).

It makes me think the fault is the government's, for inventing ISAs with so much red tape, rather than the banks.

The logical conclusion is that it is now time to stop the ISA scheme altogether. After all they were invented by a Labour government, not either of the coalition parties. Instead the current suggestions to make all savings interest tax free (or even just allow a certain amount of savings interest to be tax free) would be just fine for most people - although I can't quite see how the government can afford this just now.

Err ISAs are a modification of TESSAs and PEPs which were invented by Thatcher's Conservative government.

As to why cash ISA returns are comparatively low - surely its that banks only need offer a small benefit above taxed non-ISA rates to attract customers so there is no reason to offer more.

grey_gym_sock

Linton wrote: »

Err ISAs are a modification of TESSAs and PEPs which were invented by Thatcher's Conservative government.

ok, so by that logic, they should be renaming ISAs now

As to why cash ISA returns are comparatively low - surely its that banks only need offer a small benefit above taxed non-ISA rates to attract customers so there is no reason to offer more.

no, because cash ISAs are in competition with cash ISAs from other providers.

Linton

grey_gym_sock wrote: »

just abolish ISAs and increase the personal allowance slightly (by enough that the changes are revenue-neutral).

the personal allowance is available for both earned and investment income. why should there be a special allowance only available for investment income?

The reason for the special allowance I guess is to encourage people of average or less than average wealth to save and invest, as this could reduce the need for state benefits and increase the stability of society as a whole.

oldvicar

grey_gym_sock wrote: »

just abolish ISAs and increase the personal allowance slightly (by enough that the changes are revenue-neutral).

the personal allowance is available for both earned and investment income. why should there be a special allowance only available for investment income?

I quite agree. We have come a long way since the days of the Investment Income Surcharge of the 1970s - 15% on top of usual income tax rates (33% to 83% IIRC).

I don't know why, but there does seem a trend to tax those who have savings income less than those who work hard for a living. Suits me personally, but I can't defend it.

Old_Slaphead

grey_gym_sock wrote: »

the personal allowance is available for both earned and investment income. why should there be a special allowance only available for investment income?

Because for most people investment income has been generated from earned income that has already been taxed once ?

grey_gym_sock

Linton wrote: »

The reason for the special allowance I guess is to encourage people of average or less than average wealth to save and invest, as this could reduce the need for state benefits and increase the stability of society as a whole.

but isn't it at least as beneficial to encourage people of less than average wealth to earn more, by increasing the income tax allowance for earned income, or where NI starts, or reducing the rate at which means-tested benefits are clawed back? AIUI, the combination of those 3 (income tax, NI, benefits clawback) can be an effective marginal tax rate of 80% or more. (sorry to be vague, but i don't know much about the benefits bit.)

grey_gym_sock

Old_Slaphead wrote: »

Because for most people investment income has been generated from earned income that has already been taxed once ?

so ...

person A: earns £1000, saves/invests some of it, earns another £50 in interest (or however).

person B: earns £1050.

why should B pay more tax than A?

i think they should pay the same tax.