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Will the ISA changes really make us better off?

Will the ISA changes really make us better off?

Category: ISAs

Updated: 21/03/2014
First Published: 21/03/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The announcement that ISAs are in for a massive shake-up has been largely welcomed by the nation's savers. But, will the changes really make the majority of us any better off? We take a closer look…

First up, let's look at what the changes actually are. Well, as of 1 July the distinction between stocks and shares and cash ISAs will be blurred – transfers can be made between the two types with the full ISA allowance able to be spent in any way you choose, giving you much more flexibility and ensuring you're in control of where (and how) you save your money.

And, the biggie: the annual ISA limit will increase to a whopping £15,000, and you can choose to put the whole amount in a cash ISA should you wish – unlike the current system where only half the allowance can be saved in cash.

Sylvia Waycot, editor at Moneyfacts.co.uk, commented on the news:

"Chancellor George Osborne's announcement that ISAs are to be inter-transferable is terrific. The inflexibility of not being able to move from stocks and shares to cash or being able to put the entire allowance into cash ISAs has been a bugbear for industry and consumers alike.

"Frustration has long existed at the unfairness of a system that penalises those who are risk averse and prefer the safe haven of a savings account, but this this latest announcement means that savers will be able to invest their total ISA allowance in a form of savings that makes them feel comfortable."

It's definitely a great boost for savers, particularly at a time when savings rates have been so pitiful – the chance to earn more interest without paying tax on it will always be appealing – and if ISA rates were to start picking up, something which perhaps isn't quite so likely, it truly would be the icing on the cake.

However, it's been met with some criticism too. The main point of contention is that the new £15,000 limit will only really benefit the wealthy, with calculations from IPPR suggesting that people would need to be earning at least £125,000 a year to make the most of the new rules.

"The Chancellor is right to try and encourage saving but it would have been far better to focus on low to middle earners, for example through a scheme that matched their savings up to a certain limit, rather than to give further tax relief to the better off, said IPPR director Nick Pearce. " Even if someone is able to save 20 per cent of their disposable income, they would need to be earning around £125,000 to make the most of the new £15,000 a year limit. At a time of austerity these earners should not be the priority for additional tax breaks."

Of course, if you're lucky enough to be able to save that much, then this new system will be a huge benefit. But, a word of caution – if you're looking to take advantage of the full ISA allowance once the higher limit comes into place in July, don't be too quick to put all your ISA eggs in one basket!

A lot of people might be tempted to automatically open a fixed rate ISA at the start of the tax year to secure the best rate and take advantage of it for as long as possible. But, there's a potential pitfall here – if you fix chances are you won't be able to add to your pot once the new limit comes into place, and you won't be able to open a separate ISA either. That means you could potentially lose out on the chance to save £15,000 in the 2014/15 tax year, and that could mean a lot of lost interest.

That's why it might be best to hold your guns – if you want to secure the best rate (and therefore the best return) by fixing, wait until July! That way you can be sure you're maximizing your allowance to its fullest potential, and you'll benefit from added flexibility too.

So, will the ISA changes make us better off? Potentially, yes – the added flexibility can benefit everyone no matter how much they're able to save, while those who can save at higher levels can really make the most of it by generating bigger tax-free returns. With the savings market languishing over the last few years, this could be just what we need to breathe some life into things!

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