Personal Finance: Individual Savings Accounts

The amounts that can be invested in cash-based Individual Savings Accounts, which will take over from Tessas, are too small to cover costs and pay a good enough rate of interest to attract small savers

THE DECISION to hold interest rates unchanged at this week's meeting of the Economic Policy Committee is welcome for several reasons, not least because it has helped bring down the exchange rate and promise some relief to hard-pressed exporters.

It will also prevent a correction in the property market which, according to most reports, is looking finely balanced outside London.

Things are not looking too good, however, for cash-based Individual Savings Accounts, which are supposed to take over from Tessas next April.

When the detailed proposals were announced last autumn, they were criticised on the grounds that an annual limit of pounds 1,000 on the amount that could be invested was too low, and many savers would, therefore, be tempted to put more than they should into equity-based ISAs (which replace PEPs) where there was a significant risk of their capital shrinking in value, at least in the short run.

Events of the last month show the risks only too clearly. The FTSE 100 index has now fallen by just over 10 per cent from the all-time peak it reached barely a fortnight ago. By some definitions that rates as a correction, if not yet a full-blown bear market.

For most investors, of course, to save pounds 1,000 a year is quite a large sum after paying domestic living expenses, yet a higher limit is desirable for many prudent people who could save more than pounds 1,000 a year, but who would not want to put money into equities.

Moreover, banks and building societies, stores and supermarkets, which are expected to offer cash-based ISAs, need a higher average amount in the accounts to help keep down charges. This is absolutely crucial if the providers of cash-only ISAs are to cover their costs and still offer an attractive rate of interest to savers.

The average cost of running a cash ISA is estimated at nearly pounds 20 a year, compared with pounds 10-pounds 15 for administering a Tessa. This is mainly because, unlike a Tessa, savers can put money in and take it out of an ISA at any time without losing the tax benefits, and this inevitably increases costs.

But the tax savings on a cash-only ISA account containing pounds 1,000 and earning 7 per cent interest would only be pounds 14 a year to a standard-rate taxpayer compared with a conventional account paying interest gross.

At the moment, then, the sums just do not add up. No wonder that although the research organisation Datamonitor thinks that supermarkets are ideally placed to offer cheap cash-only ISAs, both Sainsbury and Tesco have decided not to offer them in-store where savers want them.

If cash-only ISAs are to offer the instant access which is essential to attract small savers, and also allow the providers to cover their costs, they may start by offering at least 1 per cent below the market rate of interest.

Some market research companies claim that insurance companies could enter the market for cash-only ISAs, using ATM machines and retail stores as outlets and subsidising the accounts by cross-selling more profitable products like pensions to their ISA customers.

But rather than relying on cross-subsidies, it seems more sensible for the Treasury to increase the amount individuals can save and hold in a cash-only ISA, both to hold down average management costs and make sure the interest rate is competitive.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence