ISA rules unfair say UK savers

New research from Clydesdale and Yorkshire Banks has revealed that 84% of savers in the UK believe current rules on Individual Savings Accounts (ISA) are unfair and penalise risk-averse savers.

The annual ISA limit is currently £7,200, and £10,200 for the over-50s (£10,200 for all from 6th April 2010), and can be made up of a combination of stocks and shares, and cash. 

Any saver wanting to make use of the full annual allowance has to invest at least half in stocks and shares; limiting cash investments to £3,600 per year (£5,100 for the over-50s, and for all savers from 6th April).  As a result, savers who do not want to risk the volatility of the stock market are unable to make full use of their ISA allowance.  A change to the rules, allowing savers to invest up to the full ISA allowance in cash alone, was backed by 75% of respondents. 

With calls for people to save more, tax-free savings are seen as a way to stimulate the habit.  Seven out of ten (70%) people believe that tax-free savings, like ISAs, encourage people to save.  Worryingly, almost a quarter (22%) believe the encouragement only impacts the wealthy, which may be linked to the perceived bias of the rules towards stocks and shares investments.

When asked their views on what is the best way to accrue money in the long term, three times as many respondents answered "cash savings in banks or building societies" than did "stock and shares" (31% : 8%).

These latest findings follow Clydesdale and Yorkshire Banks' announcement last month that UK savers have on average missed out on over £1bn of tax-benefit on their saving returns every year by failing to use the full ISA allowance.

And with an increased allowance of £10,200 in effect from April 2010, if UK savers continue to fail to make full use of the annual ISA allowance they could potentially lose £1.7 billion pounds in tax-free interest in 2010/2011.

Commenting, Steve Reid, retail director for Clydesdale Bank, said: "The lack of flexibility in ISA rules means that a significant number of taxpayers cannot make full use of the ISA allowance.

"Savers and investors clearly feel that they should have the right to make full use of the allowance within their risk profile.  A higher allowance in the new tax year is of little benefit to those who are risk averse if they can only make use of half of it.  If we want people to save more we have to support those for whom the stock market represents too much risk.

"Clearly there are places for cash and stock market investments, but to truly encourage saving, consumers should have the choice to invest their full allowance in cash."

Clydesdale and Yorkshire Banks have launched two new fixed rate ISAs offering a choice of 1 and 5 year terms and rates of 3% and 5% Gross/AER, respectively.