Budget 2010: ISA limit changes receive mixed reaction Go compare with our comparison table

Budget 2010: ISA limit changes receive mixed reaction

25 March 2010 / by Andy Davies

Alistair Darling's Budget announcement that ISA limits will rise yearly in line with inflation has been met with mixed reactions from financial experts.

While some have been quick to praise Mr Darling's efforts to encourage more people to save, others believe the changes do not go far enough.

With the ISA limit set to increase to £10,200 for all savers from 6 April, yesterday's announcement means that if inflation averages out at the Government's two per cent target over the next 12 months, the ISA limit could rise above £10,400 for the 2011/12 tax year.

Barbara-Ann King, head of investments at Barclays Stockbrokers has welcomed the news, saying it is a "step in the right direction" to encouraging people to save tax efficiently.

"The yearly increase in the ISA limit should further incentivise people to save within tax efficient vehicles – making the most of both their cash and equity allowances," she said.

Also commending the chancellor's decision, Philippa Gee, spokesperson for T. Bailey believes that this will continue to make ISAs a "really valuable tool", particularly for those using an ISA in conjunction with a pension.

"The fact remains that interest rates are low and unlikely to change dramatically in the short term, depending on the election. This increase will at least help investors to improve the return on their investments by increasing automatically the amount that can be sheltered free of tax. The ISA is here to stay – ignore it at your peril," she said.

However, Alan Easter, director of discount broker Willis Owen claims the decision by Mr Darling to raise the annual ISA limit in line with inflation could cause confusion amongst ISA savers.

"There is a danger that raising the allowance by a small amount every year will cause confusion for consumers," he said, before adding it will "cause difficulties for those consumers who invest on a monthly basis who would have to alter the direct debit payments."

Meanwhile, Andrew Hagger, spokesperson for Moneynet.co.uk, thinks the measure does not go far enough to help cash ISA savers, stating that it is "token gesture" which is likely to cost providers more to administer.

He suggests that if the next inflation increase is 2.5 per cent, a £5,100 allowance would increase to £5,227 next year. If this additional £127 was invested in a cash ISA paying three per cent, he says savers would earn an extra £3.83 in interest compared £3.06 if the limit remained at £5,100.

"So the tax free benefit for a full year would amount to 76 pence – hardly a vote winner, however you wish to dress it up!

"A more useful option to give savers a real break would have been to allow the full £10,200 limit to be used in a Cash ISA, even if it was just a temporary measure for a year or two until traditional savings returns begin to recover from their record lows," he said.

© Fair Investment Company Ltd

 

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†† Income payments are dependent upon the FTSE 100 Index.

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