UK Budget: small boost for struggling savers
By Datamonitor staff writer
The 2009 Budget contained a sliver of good news for savers with the announcement that, from April 2010, everyone will be able to invest up to GBP10,200 in tax-free ISAs each year. However, due to base rate reductions the benefits of the scheme will be minor, and the new legislation would be improved if it allowed more flexibility, particularly for people over 50.
The 2009 Budget has done little to lift UK consumers' gloom but, for savers, there is a glimmer of light. New legislation means that savers will be able to place up to GBP10,200 into an individual savings account (ISA), GBP5,200 of which may be in a cash ISA, with the remainder placed in stocks and shares, either through the equity or bond markets. At present, consumers can only save up to GBP7,200 in an ISA, of which GBP3,600 may be in cash. Those savers aged over 50 will be able to benefit from the increase within the current tax year, as of October 6, 2009, while everyone else must wait until April 6, 2010.
The benefits of the scheme in the current climate will be small due to low interest rates, but even this will be welcomed by struggling savers. Due to the base rate reductions over the course of the last year, the average ISA account now pays interest of just 2%. Therefore, tax relief on interest earned will not be substantial, but the change in legislation encourages an increase in saving and raises the profile of ISAs.
From the perspective of ISA providers, this is an excellent opportunity to increase their share of an enlarged market. Marketing campaigns which target those aged over 50 will be influential in attracting clients. There is also potential for providers to increase the relationship and trust levels with their clients, as they are highlighting ways in which to save the client money.
However the government could have gone further, without incurring a large opportunity cost. Chancellor Darling has acknowledged awareness of the problems facing the over-50s baby boomer generation, many of whom will soon be facing retirement without a substantial pension. Yet the two-tiered introduction system seems to bring about additional complication for a marginal benefit. This contradicts the idea of 'transparency', which has seemingly become Labour's buzzword for a new financial age.
It would have been more effective for the government to increase the ability of over-50s to save in cash, perhaps by increasing the cash ISA allowance further, and freezing the stocks and shares allowance at its current level of GBP3,600. Older people are naturally more risk averse, so are unlikely to want to invest GBP5,200 in stocks and shares, particularly when equities markets have collapsed spectacularly. Little benefit will be derived from encouraging the over-50s towards equities exposure in the current climate, whereas greater tax relief for cash ISAs would have provided these consumers with greater low-risk income.
Therefore, although the intentions behind the move are commendable, the details are not wholly satisfactory. While the new legislation should encourage UK consumers to save more, the rewards of saving will continue to be minor. Furthermore, acknowledging the problems that face over-50s is a step in the right direction but the expanded investment options do not go far enough.