Will you save more in ISAs or out of ISAs in 2016?
As October draws to a close and we brace ourselves for the downhill slalom towards Christmas, this might be a good time to think about saving, at least, according to Yorkshire Building Society is it, who have surveyed a load of people to ask them about their savings habits, particularly around cash ISAs.
The point is that, in just over five months’ time, ISAs will be undergoing some changes. Not only will investors now be able to invest in peer-to-peer (P2P) lending- which has increased massively in popularity owing to the shoddy returns available in more traditional savings accounts- but also savers will be allowed to withdraw cash from their ISA and later reinvest it, provided the total net amount contributed does not exceed the annual limit (currently £15,240). This flexibility has been hailed as long overdue and that these important changes will encourage more people to put savings inside an ISA wrapper.
Yorkshire’s research suggests that around 405,000 ISA savers will choose to invest in peer-to-peer lending when it becomes part of the tax-free ISA scheme next year. P2P is a sizeable and growing market with UK investment now totalling about £3.5bn, around 0.2% of the total £1.7tr savings market, according to Yorkshire’s figures. However, despite the large numbers of people investing in the market, research has shown a lack of understanding of P2P lending among consumers. Just 42% claimed to be familiar with the term and, of those, 60% were unaware that they had no protection under the Financial Service Compensation Scheme.
The Yorkshire’s study also revealed that more people are likely to save, with one in five (19%) of those who do not already save in an ISA expected to open one, and almost one in four (23%) of those who already have an ISA planning to increase their deposit amounts. Just one in ten (11%) of those questioned said they definitely will not take advantage of the changes.
Overall, investors expect on average to contribute £95 a month into savings – more than £1,100 a year – with the majority planning to save into cash ISAs and bank and building society saving accounts. However, the research also suggests that some savers are starting to look at putting their money into more traditional types of investment, with 1.1m planning to invest directly into the stock market and 1.5m considering bond investments.
Part of the reason for this change might be the changes to savings income taxation announced last year, that will also take effect from April next year. From the start of the new tax year, savings income of £1,000 for basic rate taxpayers, or £500 for higher rate taxpayers (additional rate taxpayers get nothing), will now be taxed at 0%, changes it has been suggested will make cash ISAs obsolete.
While you can save £15,240 annually into an ISA, on the current best buy easy access savings rate of 1.65% means that you would need a savings pot of over £60,000 before you started paying tax, and most people save way less than the maximum into their ISA- based on the estimated £1,100 a year above, it would take over 50 years to accrue that sum. So why would you save in a cash ISA?
It remains to be seen whether cash ISA rates will be better than standard savings rates, but all interest on savings will now be paid out gross (i.e. before deduction of 20% as is currently the case) so there is no cashflow advantage of investing in an ISA. However, some experts suggest that, particularly if you are looking to pile up a larger sum, that ISA investing still makes sense given that Governments can change income tax rates at the whim of a budget, but it will likely be harder and require transitional provisions to reverse the tax-free status of established nest eggs held in an ISA.
So what do you think? Will the new ISA rules make you more inclined to invest there? Or will you not bother and just use your tax-free savings allowance?