SAVERS are “abandoning the cash ISA en masse”, as the personal savings allowance (PSA) makes the tax-free wrappers less relevant for consumers, a Zopa executive has said.
New data from UK Finance showed that investment in cash ISAs fell from £773m in March 2017 to just £332m in March 2018 – a decrease of 42 per cent.
According to Andrew Lawson, chief product officer at Zopa, the cash ISA exodus is due to a combination of low interest rates and the introduction of the PSA last year. The PSA allows basic rate tax payers to keep up to £1,000 of the interest earned on their savings each year. Higher rate taxpayers can keep up to £500.
“This is further evidence that people are abandoning the cash ISA en masse,” said Lawson.
“However, with another interest rate rise on the horizon, people who rely on the PSA need to keep a close eye on their savings so they don’t get caught out.
“Customers really could lose out if they use the PSA instead of the ISA, because the PSA is only tax free for one year while investments into the ISA are tax free for life. Of course, there are plenty of alternatives out there – such as the Innovative Finance ISA (IFISA) – which have higher returns than cash ISAs and are covered by the tax-free wrapper but come with a bit more risk.”
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During the 2017/2018 tax year, UK consumers withdrew £7.6bn from cash ISAs at the high street banks, while investing more than £16.7bn into taxable savings accounts.
Zopa has calculated that if a higher rate tax payer paid an additional £20,000 each year into cash at one per cent for five years they would net after tax £2,664 in interest, paying £374 in tax during that period. However, according to the lender, the same higher rate tax payer investing the same £20,000 per year into an IFISA would net £12,660 in interest.