VSavers have suffered a triple blow in recent times and Government has ignored it. It is time to reform the ISA rules to offer some help.
It is over three years since the Bank of England brought interest rates down to 0.5 per cent, dramatically reducing savers’ income. Moreover, with inflation overshooting the two per cent target, the real value of their savings has been whittled away. Then, adding insult to injury, their interest income is taxed. Savers did not cause the economic crisis, but have paid a heavy price from policies designed to fix it.
Since National Savings withdrew their inflation-linked tax-free bonds, the best option for tax-free savings nowadays (outside a pension) is the “use-it-or-lose-it” £11,280 annual ISA allowance. But the rules allow only half of this to be put into cash ISAs. The other half must go into stocks and shares. And investors are allowed to switch from a Cash ISA to an investment ISA, but not the other way round. This is unfair on millions of savers. Younger people saving for a house deposit need to know that the money will be there for them, and older savers, who have set money aside for later life, can’t afford to gamble with their nest egg. The Treasury should not tell people how to save their money — individuals can decide what assets are best for themselves. Switching to cash is often what they need to do, so why should they lose their tax-allowance
It is hard to fathom what the rationale for these restrictions is. Stocks and shares ISAs can be invested wholly in foreign firms, so the current rules may not benefit the UK economy at all, whereas cash savings are more likely to be spent here. Allowing an extra £5640 a year into tax-free cash ISA savings would be a welcome boost to hard-pressed savers. The Chancellor should change these rules in his next Budget. Abolishing old-fashioned ISA restrictions would provide relief to savers and go some way towards compensating for the damage done by monetary policies designed to help borrowers and banks.
Ros Altmann is the director general of Saga and a former government pensions adviser