For millions of Britons, an individual savings account (ISA) is a no-brainer.
Once your money is invested, any interest paid or performance growth accrued is tax free. What's more, a new ISA can be taken out every tax year meaning that it doesn't take that long to build up a sizeable tax-free pot of cash and shares which can be used by the saver at any time.
However, despite their undoubted success ISAs still aren't taken up by a sizeable chunk of people who could afford to do so. In surveys, these ISA refuseniks often cite time and lack of convenience as key reasons. Now, though, some of the UK's largest employers will start offering ISAs in the workplace to staff, with contributions deducted straight from post-tax pay packet – at a stroke making it easier for Britons to get into the ISA saving habit.
American fund management group Fidelity said last week that it would start offering workplace ISAs to hundreds of UK firms which currently use it to manage their company pension scheme. "The beauty for employers is that these schemes are easy to administer. All they have to remember to do is deduct the contribution from post-tax pay and it adds to the list of benefits they can offer their staff," said Julian Webb, the head of defined-contribution business at Fidelity. "We hope to have a couple of big-name firms signed up by the April tax deadline and are in negotiation with firms with thousands of employees."
The emergence of workplace ISAs came as a report from accountancy firm UHY Hacker Young showed that the traditional vehicle for workers to put away cash – employee share incentive schemes – is withering. "The administrative cost of share schemes has risen, and with a lot of employers funding schemes out of their own pockets many have been persuaded to reassess whether they want to provide this kind of benefit," Roy Maugham, a tax partner at UHY Hacker Young said. As a result, the number of companies running share schemes open to all staff has declined by 10 per cent over the past two years.
But it seems it's not just employees who no longer have access to a share incentive scheme who are being targeted for a workplace ISA.
"At one end of the scale, we have firms looking to help high earners who could be caught out by the new £50,000 annual limit on pension contributions. At the other are companies with a younger workforce who are not engaged by pensions, don't like the lack of flexibility, but the way ISAs work is much more appealing to younger staff members," Mr Webb said.
Fidelity is not the only firm in the field. Hargreaves Lansdown has been offering workplace ISAs for several months, and reports that one in five employees who was saving in a pension has started to contribute to a workplace ISA as well. "If our result were replicated across the economy, it would be a huge fillip to workplace savings," Danny Cox from Hargreaves Lansdown said. "Savings to ISAs through payroll are a very convenient way to save. They also follow the mantra of 'pay yourself first'. Your money for your ISA leaves your net pay before any bills. This helps avoid the situation where savings fall by the wayside as the salary is already spent before the month or week ends."
Fidelity's and Hargreaves Lansdown's schemes are based around offering access to hundreds of investment funds rather than the safe option of cash savings accounts. Savers pick the funds they would like to invest in rather than have them recommended by an independent financial adviser – although some firms may offer advice as part of their employee benefit package. There are advantages and disadvantages to a go-it-alone approach.
A major advantage is low cost. Fidelity's and Hargreaves' schemes offer a heavily discounted initial charge on their workplace ISA. "Our funds Network Service has an average initial charge on fund investment of 1.25 per cent, but if you buy the same fund through a workplace ISA you can expect to pay no initial fee at all. On the maximum ISA investment of £10,100 a year, that is a saving of £127 on average from the normal level of fees," Mr Webb said.
However, an investment in the stock market is risky. "The FTSE is still lower than it was in 2000 so you have to be aware of the downside," said Darius McDermott, managing director of Chelsea Financial Services. "But now it's much easier to self-select the fund you want to invest in.
"Be aware, though, of some basic points about investment. Take into account your age and your attitude to risk. If you are in your fifties and don't like risk, then don't put your workplace ISA into an emerging markets fund. Whatever the scenario, remember as you approach retirement to reduce the risk in your portfolio."
Darius McDermott, Chelsea Financial Services
"Workplace ISAs are a welcome way of boosting the level of savings in this country. Their great appeal is convenience with contributions made directly from salary. But remember, stock market saving isn't for everyone. Ensure you have a savings cushion in place to take care of emergencies first or are in the process of building one up before taking the plunge."