Although only introduced in April 1999, individual savings accounts (ISAs) are now a huge part of our everyday lives. The majority of the nation should be able to vaguely explain what one is, with the remainder of the population going as far as being able to give advice about where to get one, which ISA is the best on the market and even being capable of knowing what ISA stands for; but not too many people could go into great detail about the specifics surrounding ISAs, how they’ve changed over time and what this means to different salary bands.
ISAs are constantly evolving and change over time, but is this good news for the account holder or bad news? It’s dependent on their income. The good news is, regardless of how much or little you may know about ISAs, HM Revenue & Customs‘ (HMRC) statistical release late last year, offers evidence to suggest that ISAs are in fact becoming bigger and better which will only become beneficial for the account holder – but here’s the catch – only if they increase their monthly instalments being paid into their ISA. It is of the opinion of the account holder whether this is good news to them or not and it will likely depend on an individual’s personal circumstances as to their opinion on the matter.
I will explain my findings, but firstly, if you are of the majority with little knowledge about ISAs, we’ll go back to the drawing board and explain what an ISA is and then explain how they are changing for the better, or worse.
So, what is an ISA?
There has been a lot of bad press recently regarding ISAs, especially during the time of the recession and the main focus of the debate remains centred around dwindling interest rates. However, although the interest rates are reducing, ISA accounts are becoming increasingly popular and each individual account is growing. This means that they are still very beneficial, but only if more funds are paid into them to accommodate for the fall in interest rates. In the banks and the building societies defences, the amounts of interest needs to decrease at the same rate as the ISAs popularity grows as to avoid the banks pricing themselves out of their own profits. Banks and building societies need to reduce interest rates as they pay extra money to ever-growing accounts in order to balance the books.
ISAs are tax exempt accounts specialising in either cash instalments or stocks and shares. According to the release by HMRC, in their introductory year of 1999/00, 9.2 million people subscribed to an international savings account which increased 56% over the decade bringing the number in 2009/10 to 14.4 million. This may seem like a huge increase – and it is – but when you consider that over the following year (taking us to 2010/11 [latest data available]), the numbers rose a further 7% in one year to 15.4 million subscribers to ISAs that there is no surprise that banks are having to consolidate their outgoings by reducing the amounts of interest they pay to ISAs whether they be cash ISA’s or via stocks and shares.
What does that mean to us?
The amounts of money paid into any form of ISA over the same time periods has also increased. In fact, has almost doubled. In the introductory year of 1999/00, £29 billion was paid into ISAs, in 2009/10 it was £44 billion and in the latest year where data is available, the amounts had exceeded £54 billion; an increase of 86% over an 11 year period. 78% of the money was paid into cash ISAs with the other 22% going into stocks and shares.
The increase in money being paid into ISAs and increase in ISA accounts being subscribed to could be down to an increase in the payment limit for ISAs. The maximum amount of money which can be paid into any individual ISA is set prior to the year beginning, meaning that the limits for this year and next year’s ISAs (2012/13) has already been set at an overall subscription limit of £11,280 and a cash ISA limit of £5,640.
To emphasise the increase over time, here is a table HM Revenue and Customs’ statistical release:
This shows that the limits in the amount of tax free money which can be paid into ISA accounts is increasing. Meaning account holders with larger income may benefit from these increases as they have more funds available. The following graph is from the same document and explains what I mentioned earlier about opinions could change dependent upon the individual ISA holder’s personal circumstances and their incomes could be the catalyst which sparks their opinion on the matter of ISA limits increasing whilst at the same time banks are reducing their interest rates.
The graph also shows that as earnings increase, the impetus and majority of accounts alters from a cash ISA for lower band incomes and slowly changes to stocks and shares as the salary increases.
This ultimately means that for account holders with lower incomes, the decrease in interest rates could be seen as a negative impact as they are unable to increase the instalments paid into their ISA. However, for ISA subscribers in the higher salary thresholds, they have the option to increase their instalments to fully maximise their profits made from interest payments. They also seem to put more capital into stocks and shares. This could be due to their ability to regularly afford financial advice from professionals who can use their expertise to advise about where the best place to invest their money could be.
That said, whenever spare funds become available for account members with the lower threshold salaries, it is advised that you should be paying as much into your ISA as possible to maximise the benefit received from tax free interest as the banks and building societies continue to decrease their rates.
About The Author
Adam Veitch writes on behalf of Haworths Financial Services, a UK based team of independent financial advisors from Accrington, Lancashire.