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With interest rates at record lows it's getting harder and harder for savers to earn a decent return on their money. Isas should therefore be a first port of call, but evidence shows that many savers fail to take advantage of this valuable tax break, and in December more money was pulled out of cash Isas then was actually invested in them.
Kevin Mountford , who is head of banking here at moneysupemarket.com, is here to explain the value of cash Isas and why they shouldn't be overlooked.
Q1: So Kevin, can you just explain what an Isa is and why savers should be looking, particularly at this time, to take advantage of them?
Kevin Mountford : Yes, well basically the government introduced individual savings accounts several years ago, to incentivise people to save money. So what it is is a tax-free wrapper that basically works alongside a savings product - it could be any sort of savings product really - and where as normal you would pay tax on your interest earnings on an allowance of £3,600 a year that's not the case so effectively whatever you earn, you keep - you don't pay tax on it.
Q2: So its effectively a boost isn't it, so for higher rate tax payers its equivalent to earning probably a rate in excess of 5% at the moment given that the best cash Isas are paying about 3%?
KM: Yes. Basically people lose sight of the fact that with most savings accounts or the majority that don't sit inside an Isa, you pay tax. So you see a strong headline rate you have then got to be taking either your rate of tax off at higher or standard - depending obviously on where you sit.
So it's very important to look at the net results, and as you rightly say for a higher rate tax payer you would have to be earning over 5% and for a standard rate tax payer over 4%. Well these products just don't exist at the moment, so you have got something like a Natwest Isa paying I think 3.25% the last time I looked, so that just could not be beaten for a higher rate tax payer.
Q3: So you can put in £3,600 each tax year, the current tax year ends of the 5 th April, so we have not got long left have we if you want to take advantage of this years allowance. Are you expecting to see a rush for Isas then in the next few weeks?
KM: Yes, I have not seen the latest reports but there are something like 15million Isas in existence, they have been a real success story, but around about 70% of those are all written within that 5-week window, so all through March and the first week in April and over the next couple of weeks should see increased competition from banks and building societies to try and get as much of the Isa business as possible.
Q4: And what about Isas that people have taken out in previous years? Because obviously Isa rates, as with all savings rates, have fallen recently because of the interest rate cuts. So if you have got money sitting in an Isa that is no longer paying a competitive rate of interest can you move it to another Isa and still retain the tax break?
KM: In some circumstances you can. It's one if the important considerations when you are looking at products, not just to look at the rate but look at the terms and conditions and some won't allow you to transfer money unless you pay a fee - other accounts won't allow you to transfer money in. So effectively all you could deposit is this year's allowance, the £3,600, so you need to look very closely. But yes, in theory, what you want to do is look at the rate on your Isa and if there is a better product then move all or part of that money.
Q5: But you have to be quite careful that you stipulate it's a transfer, because if you close your existing account and then look to reinvest the money you have lost the tax break on that money, haven't you?
KM: Yes, the process is such that the provider that you're going to, the bank / building society that you're going to when you complete your application, you tell them that you want to transfer your existing allowance and they are meant to do everything on a seamless basis.
What's interesting is that all of this business is squeezed into quite a short period and we have seen some real horror stories over the years gone by where we have had delays in transferring, but effectively you have got to leave it down to the banks.
If you draw that money out, and you walk into a branch with some cash in your hand or with a cheque, then you have effectively lost your Isa allowance for those previous periods.
Q6: And what about the limit, because obviously savers have been really hard hit by the recent interest rate cuts, and some lobby groups are calling for the government to increase the Isa allowance. Do you think it's necessary to increase certainly the cash element of it?
KM: Yes, most definitely. The message for many, many years is that we as a nation have got to save for our futures. We have seen so much widely reported news around problems with pensions etc. so we need to put some money away, the problem is 'where's the incentives'? And something like Isa allowances is an obvious opportunity.
I would be calling for a significant increase in allowances or ideally even... .
Q7: How much?
KM: Well you know, let's go for £10,000 or something? Or better still lets remove tax off interest earnings - we have all paid it at source or the majority of us I guess, and that hard earned cash has got to work as effectively as possible.
Q8: So is there anything else you can do as long as Isa limits remain as they are to maximise the benefits. Is there anywhere else you can put your money that's tax free?
KM: I mean you have got stocks and shares Isas as well, which is a similar sort of situation but as the name suggests you are investing in the stock market. [There are] lots and lots of different options there depending on what sort of return you want, what sort of attitudes you have to risk, but by and large you need to be seeking some advice before you go down that route.
The other thing is there's also National Saving & Investments - they have a number of products that also have tax free status, so all of these things are worth considering because at the end of the day we need to be more vigilant then ever to get the best return possible on our investments.
Q9: And of course if you are married you can split your money and use your spouse's allowances as well.
KM: And we have reported before about the safety aspect with the compensation scheme, same situation there, if you are doing it in joint names you have both got the protection of £50,000.
So these are exactly the kinds of things that you have just got to think about in today's market.
Q10: So savers have to be more vigilant?
KM: Very much so.
CF: Great, thank you Kevin.
KM: Thank you.