Don’t touch Isas – they’re one of the only useful tools for penalty-free saving in our already tax-heavy lives, argues LEE BOYCE.

Howard and his Isa, Isa baby television commercial to celebrate 25 years 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 has been a lot of tinkering in the past and a general obsession with releasing Frankenstein-style new versions, but at their core, they are easy for people to understand: a key component for anything to be successful, not just financial tools.

You get an annual allowance of £20,000, and the two simplest versions (Cash Isa and Stocks and Shares Isas) are incredibly useful for those diligently saving for their future.

In recent years they have become easier to open, there is much more competition, investment fees have been reduced and with savings rates rising after years of a rock-bottom base rate, it means they are a crucial way for people avoid taxes on the interest they earn. .

I would say that in a country where the tax burden seems to be growing in the form of tax burden, Isas are a ray of light.

This week they have been made even simpler with a measure allowing savers to open a mix of tax-free accounts, rather than restricting them to just one of each type per financial year.

But also this week they have been in the line of fire of the Resolution Foundation. 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 rising in cost” and that Isas are “ineffective at increasing long-term savings”.

So let’s address these three points raised in the document.

Firstly, I wouldn’t say they are aimed simply at the often maligned ‘rich’, although an annual limit of £20,000 is generous for a generally savings-shy population. 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 savings before they are taxed.

When savings rates were mega-low, this didn’t matter as much. But in a higher rate environment, it does.

A savings balance of £10,000 earning interest at 5 per cent a year will put you above the PSA parapet. More are being dragged into this tax web of higher rates thanks to frozen thresholds and an Isa is a small shield against the greedy tax troll.

It’s no surprise that those on higher incomes benefit more from Isas as they are naturally more likely to save more, but if they start adding lifetime limits and changing goals they will lose credibility.

For me, they are naturally the second place to generate wealth; The first is a private pension. But you can’t take advantage of any of that until you’re 55 (57 as of 2028). Isas are much closer at hand – they break in an emergency.

Which leads me to say that it is “ineffective at generating long-term savings.” Nonsense. In my opinion, the opposite has been done.

People tend to build up an Isa pot and then become quite obsessive about continuing to do so, sheltering it from tax and growing it over the years – their savings baby that eventually grows into a full-sized adult.

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

Kevin Mountford, founder of savings platform Raisin, tells me: ‘While the Resolution Foundation’s comments are noted, I think they are wrong to be too critical of Isas.

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

“However, the general tax benefits, together with the ability to flex between cash and shares, have encouraged Britons to save more than they probably would have saved if these products had not been launched in 1999.”

Finally, the Resolution Foundation says they are expensive, adding that 42 per cent of adults had an Isa, pointing to data from 2020/21.

He goes on to say that “the cost to the public purse from the loss of tax revenue from Isas is great”. He says that for the 2023/24 tax cut, the cost will rise to £6.7bn.

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

This figure has increased due to rising savings rates after a decade of stagnation for savers. And with capital gains tax dividend tax relief being reduced this year, is it any wonder more money is heading into Isas?

The Resolution Foundation often comes up with good ideas, but to me, this one is off the mark.

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

What they potentially need is more targeted help to create a savings cushion for rainy days. The problem is that, on low starting balances, 5 per cent interest is simply not enough for the huge mass of Brits who don’t see the benefits of saving.

More creative solutions need to be created on this front; For example, a monthly savings that includes eye-catching double-digit interest on small payments that increase over time.

Getting rid of a reliable and decent savings tool is not the way to go.

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

‘More needs to be done to help those who, to date, struggle or don’t bother to save.

“There is a low savings culture in the UK, where we have one of the lowest savings rates in the G20, and this needs to be addressed by government and industry working together.”

Easy Access Grunting

And speaking of simplicity, why have savings providers now made easy-access accounts so complicated?

They are basic agreements that should be easy to open and operate. You put money in and can withdraw it as you see fit.

But a quick look at the best buys shows that savings providers seem hell-bent on creating them with a variety of obstacles.

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