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Tax changes make savings scheme 'pointless'

Has the Chancellor killed the ISA?

ISAIs the ISA dead? Some experts are claiming the unforseen consequences of the Chancellor’s savings benefits last week rendered the tax-free account redundant.

ISAs were introduced in 1999 to replace Personal Equity Plans and Tessas, and the allowance has risen sharply from £3,000 to the new level of £15,240 from 6 April this year.

They have also been made less complicated with the abolition of the mini and maxi which only served to confuse people and make them less willing to invest in them.

But the big drawback in recent years has been record low interest rates which have made returns, so low that they undermine the tax benefit.

The best ISA rate around at the moment is only likely to net about £240 in interest over the year, while plenty of companies are declaring dividends paying out considerably more.

Motley Fool gives National Grid as an example. In the 10 years to September 2014 it would have turned an initial £10,000 investment into £20,400 on share price growth alone. Including dividends would have brought that up to £28,100 by doing nothing. Reinvesting the cash would have produced a return of £34,100!

Mr Osborne added to pressure on ISAs by changing the rules regarding tax on savings. Savers will no longer pay tax on the first £1,000 of savings. The move was greeted as a boost for savers.

But the change has effectively rendered ISAs pointless for people who have a salary or pension income of less than £42,700 – unless they have substantial savings.

A saver would need to have more than £72,000 deposited in the highest paying account to breach the £1,000-a-year barrier.

 

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