Preparing for over 50s £10,200 ISA limit increase

Saturday, 03 October 2009 07:35

October sees the ISA limit for the over 50s increase to £10,200. But are providers and savers ready?

Daniel Barnes looks at whether it is worth using the full allowance or holding off.

In the Budget earlier this year, the chancellor increased the tax-free savings and investment allowances on Individual Savings Accounts (ISAs) over the over 50s. The aim was to add some support for those savers who had been hit by the Bank of England cutting interest rates to 0.5 per cent.

The option to pay less tax is a small boost to savers - but is it really worth it?

From October 6th, the UK's 21 million over 50s - or more precisely anyone born on or before April 5th 1960 - will be allowed to invest up to £10,200 in a stocks and shares ISA, including up to £5,100 in a cash ISA.

This is a rise from £7,200 and £3,600. The under 50s will see their ISA limits increase in April.

But is it worth taking advantage of, or are there any better deals out there?

It pays to look not just at the possibility of just topping up to the max, but also how hard your ISA is working for you.

If you have been filling up your full allowance since ISAs came online the maximum balance - not including interest earned along the way - would be £43,200.

The interest you could earn on this could be substantial.

Are you ready?

Savings providers are starting to write to their over 50s customers and the opportunities to save more do add up.

Fidelity International estimates a total of £63 billion extra could be saved by the over 50s creating some £2.5 billion worth of tax-free income.

On average this would be £119 more earned from savings per person through the higher limit.

However, four out of ten over 50s are not aware that increases had been announced, claims Lloyds TSB. And 61 per cent do not understand the changes.

Providers have also been struggling to prepare.

The late Budget this year meant banks and building societies had less time to prepare and sort out their systems to identify which savers are over 50.

Karen Brenchley, product director at Saga Personal Finance, explains as Saga only focuses on the over 50s, this has not been a problem, but other providers have had to put in some hard work.

The problem stems from the fact provides have customers dates of birth, but their systems are not designed to use these data to link them to higher ISA allowances.

"We hope people use the opportunity to top-up," she says.

Can I top up?

Many ISA savers will have already used their allowances.

If they have a variable rate deal with easy access, topping up should not be a problem.

However, many will have filled their current allowance using a fixed-rate ISA bond to get the best rates.

This creates problems as usually you cannot buy into a bond further.

Anthony Hua, at Nationwide, explains: "On instant access ISAs, customers will be able to top them up.

"However, they will not be able to top up bonds. You will have to get a new bond, but that is not a change in policy."

He adds currently Nationwide customers can hold as many fixed-rate bonds as they wish - up to the ISA limit - and so can invest in a new ISA bond to take their holdings up to the new limit.

Other providers meanwhile are allowing savers to top-up their ISA bonds - bending the usual rules.

But not all - it is worth checking out your options.

Mid-season ISA season

Banks and building societies are searching for funds to lend - hence recent rises in savings rates.

With the prospects of the over 50s being able to plough more funds into their savings, there is a chance a new ISA season may take off.

Colin Walsh at Lloyds Banking, says: "Traditionally the ISA transfer market peaks in April around the new tax year.

"But this year's changes will no doubt result in a 'mini ISA season' as savers look to take advantage of competitive rates on an increased balance."

However, David Black at Defaqto plays down the chances of this happening.

"It is possible there will be a peak in rates, but March/April will remain the key time for providers.

"Undoubtedly there will be a desire to get retail funds, but the market will not be as manic as late March."

He adds: "But time will tell."

Stuck in the middle

There is a danger that a mini-season now could lead to problems later on.

If you haven't used you allowance already and buy in on a good fixed rate as rates rise for the over 50s, when the fixed rate does, you could be left on a low rate without any great rate around to move on.

Providers maintain rates throughout the year, but the beginning and end of the tax year do see a peak.

So the danger is if you buy a new bond now, the fixed rate bond deal will expire half way through the tax year in two or three years time, and you could be left waiting for a best rates until April.

However, in the current market time is money - and sitting on the fence now and waiting could also see interest lost to the taxman.

It's also hard to gauge where interest rates will be come 2011 or 2012.

Kevin Mountford, head of banking at moneysupermarket.com, explained inflation is also a risk for those looking to fix.

"Those people prepared to fix their rate for longer periods can find a fair few products in excess of four per cent," he said.

"However the long term spectre of inflation is likely to put some people off such deals."

For those concerned about inflation he points to the shorter-term fixes - that remain in some cases, such as Leeds Building Society's 1 Year Fixed Rate ISA, two per cent above the Bank of England's official lending rate.

"Irrespective of whether or not you feel confident in going for longer term fixed-rate ISAs, all over 50s savers with the cash should make sure their ISAs are fully topped up on October 6th," he advises.

"With increased taxes likely to become a greater burden on personal finances, any tax free offers we get should be grabbed with both hands."

ISA launches in the last month

Savings providers have been quick to launch new deals to hit the increased allowance - focussing mostly on the fixed rate deals.

Northern Rock has one, three and five year fixes at 3.20 per cent, 3.75 per cent and 4.25 per cent respectively.

Saffron has a three-year fix at 4.40 per cent, while Leeds has four fixes from one to five years from 2.50 per cent to 4.60 per cent.

Principality has launched an over 50s ISA at 3.80 per cent and Abbey is offering 3.50 per cent on a two-year fix.

From October 6th, Nationwide is offering a three-year ISA fix at 4.00 per cent.

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