Hands off Isas – they are one of the few useful tools to save without penalty in our already taxed lives, argues LEE BOYCE

From Howard and his crew Isa, Isa Baby television commercial to celebrate the 25th anniversary of tax-free accounts this week, to me, individual savings accounts are a rare beast: a successful financial product that most of the public knows and trusts.

Yes, there’s been a lot of tinkering in the past and a general obsession with launching new Frankenstein-style versions, but at their core they’re easy for people to figure out – an important part of anything to be successful , not just financial instruments.

You’ll get an annual allowance of £20,000, and the two simplest versions – the cash Isa and the stocks and shares Isas – are incredibly useful for those who are diligently saving for their future.

In recent years they have become easier to open, there is much more competition, investment costs have been reduced and with savings rates rising after years of bottoming out, this means they are a crucial way for people to avoid tax on the interest they earn. they deserve. .

I would argue that in a country where the tax burden appears to be growing in the form of budgetary pressure, Isas are just a ray of light.

This week they have become even more streamlined with a move that allows savers to open a combination of tax-free accounts, rather than limiting them to just one of each type per financial year.

But this week they were also in the Resolution Foundation’s line of fire. In its article ‘Ineffective Savings Accounts’, the independent think tank argues that they are aimed at the wealthy and suggests they should have a lifetime limit of £100,000.

It also claims that tax relief is ‘expensive and increasingly expensive’, and that Isas are ‘ineffective at increasing long-term savings’.

So let’s address these three points from the paper.

Firstly, I wouldn’t argue that they are simply aimed at the much-maligned ‘rich’ – although an annual limit of £20,000 is generous for a population that is generally frugal. It’s hard to maximize that, although many do.

Higher rate taxpayers – those earning £50,270 a year – have a paltry personal savings allowance of £500. That’s the amount of interest they can earn on their savings before it is taxed.

When savings interest rates were mega-low, this did not matter so much. But in an environment with higher rates, yes.

With a savings balance of € 10,000 and an interest of 5 percent per year, you exceed the PSA limit. Even more are being dragged into this higher tax net thanks to frozen thresholds, and an Isa is just a small shield against the greedy tax goblin.

It’s no surprise that those on higher incomes will benefit most from Isas, as they are obviously likely to accumulate more savings – but start adding lifetime limits and pushing up the targets, and you lose credibility.

For me, of course, they are the second place to build wealth – the first is a private pension. But you can only use this when you are 55 (57 from 2028). ISAs are much more within reach and can be switched off in an emergency.

Which brings me to ‘ineffective at generating long-term savings’. Poppy. In my view it has achieved the exact opposite.

People tend to build up an Isa pot and then become quite obsessive about building it up further, protecting it from tax and growing it over the years – their savings baby growing into a mature adult over time.

When you explain to the public that they can be taxed on their savings interest outside of an Isa wrapper, in my experience they often can’t believe it.

Kevin Mountford, founder of savings platform Raisin, told me: ‘While the Resolution Foundation’s comments are noted, I think it is wrong to criticize Isas excessively.

‘It is easy to question the overall value and cost to the Treasury, especially in recent years when interest rates have been so low.

‘However, the overall tax benefits, coupled with the ability to switch between cash and shares, have encouraged Britons to save more than they would likely have done had these products not come onto the market in 1999.’

Finally, the Resolution Foundation says they are expensive as 42 per cent of adults had an Isa, citing 2020/21 data.

It goes on to say that ‘the costs to the public purse from lost tax revenue on Isas are large.’ It says the cost of the tax crack will rise to £6.7 billion by 2023/2024.

That compares with a figure of £3.5 billion in 2018/19 and £4.9 billion in 2022/23.

This figure has risen as a result of the rising savings rate after ten years of being in the doldrums for savers. And with capital gains tax and dividend tax shrinking this year, is it any wonder more money is going into Isas?

The Resolution Foundation often comes up with good ideas, but for me this one goes way off the mark.

The think tank aims to improve the living standards of low- to middle-income families. It is very likely that this group of people do not benefit from Isas.

What they may need is more targeted help to build a savings buffer for rainy days. The problem is that with a low starting balance, an interest rate of 5 percent is not sufficient for the enormous group of Britons who do not see the benefits of saving.

More creative solutions need to be devised on this front – for example, a monthly savings account with eye-catching double-digit interest on small payments, compounding over time.

Taking away a reliable, decent savings instrument is not the way to go.

Mr Mountford added: ‘For a variety of reasons, Brits have never saved enough, whether for a rainy day or for a longer-term retirement.

‘More needs to be done to help those who have so far struggled or cannot be bothered to rescue.

‘There is a low savings culture in Britain, where we have one of the lowest savings rates in the G20, and this needs to be tackled by government and industry working together.’

Easily accessible grumbling

And speaking of simplicity: why have savings providers made easily accessible accounts so complicated?

They are bread and butter deals that should be easy to open and operate. You put money in and you can withdraw it whenever you want.

But a quick dive into the best bargains shows that savings providers seem determined to create them with a variety of obstacles.

This includes limiting withdrawals, short-term bonus rates, access on certain days of the year, high opening balance requirements, a low limit on how much can flow in… it has become an unnecessary minefield.