Budget 2009: Will savers really benefit?
Savers have become the 'forgotten victims' of the economic crisis, as measures to protect homeowners were pushed through and banks supported in an effort to help borrowers.
But there is still a significant shortfall in savings in the UK, particularly for retirement and the government was keen to address this in the Budget, which had several important measures targeted at savers.
A higher threshold for ISAs, an increased savings limit for Pension Credit and an extra contribution for Child Trust Funds were announced in the Budget in a bid to encourage families on a modest income to save.
Sarah Routledge asks how many people will benefit, by how much, and did the chancellor go far enough?
Alistair Darling acknowledged the plight of savers in his Budget speech on Wednesday.
"Mr deputy speaker, the fall in interest rates has been a welcome benefit to the economy and millions of homeowners whose mortgage costs have come down," the chancellor said.
"But this has also reduced the amount of interest paid out on savings - and has particularly hit pensioners who rely on this extra money."
ISAs
ISAs have been enthusiastically taken up by savers over the last ten years, offering a simple, tax-free way to save. By offering the choice of saving in a straightforward cash account, or in a riskier stocks and shares investment, ISAs have a universal appeal.
But, as the chancellor pointed out in his speech, the annual limit has only been raised once in the last decade.
"To help savers on the tenth anniversary of ISAs, I intend to increase the total annual limits to £10,200, of which £5,100 can be saved in cash.
"This new limit will be introduced this year for those aged 50 or over, and will come in next year for everyone else," Mr Darling said.
For those aged 50 and over, that means October 6th, while everyone else will have to wait until April 6th, 2010.
According to the government 18 million people have taken them out over the last ten years, so the changes will affect up to five million people who take out their full ISA allowances.
However, there will be no "overnight millionaires" according to accountancy firm KPMG.
"An extra £1,500 allowance from October 6th on a cash ISA paying three per cent will give extra income of £22.50 over the rest of the tax year, meaning a tax saving of just £9 for a 40 per cent tax-payer," says Carolyn Steppler, associate partner in personal tax at KPMG in the UK.
The higher limit had been anticipated before the Budget as one of the best ways the chancellor could help savers, and was broadly welcomed. But the six-month gap between the over-50s and the rest of the population took some by surprise.
"The complexity of introducing the age limit is going to cost millions to implement. The amount of tax that the government earns from people's interest is miniscule so why not give this to everybody in October?" says Adrian Lowcock, of Bestinvest.
Gary Shaughnessy, managing director of retail and DC business at Fidelity International, agrees.
"Simplicity has been at the heart of the ISA's success and complex new transitional rules are not only expensive to administer but may result in this misplaced initiative getting off to a confused and faltering start."
In fact, the chancellor could have taken the opportunity to change some of the other rules on ISAs to help savers in the current crisis.
Allowing people to take the entire allowance in cash, for example, would be helpful given the current cautious attitude of many savers.
"I'm a big fan of letting people make their own choices," Mr Lowcock says.
"Likewise, they should be able to swap from their shares allowance to cash."
Currently, savers can only put in the maximum amount once. If they dip into their savings, they cannot replenish them in the same tax year.
Lee Raybould, head of savings at Nationwide, adds: "Linking the ISA subscription limit to inflation will provide an added incentive for consumers to save, while increasing the flexibility of ISAs would offer greater support to those consumers who need to dip into their savings or those who are currently struggling to save their full allowance."
Pension Credit
From November this year, the allowed savings level for those claiming Pension Credit will rise to £10,000, from £6,000.
This means that around 540,000 Pension Credit claimants will benefit by around £4 per week, and provides an incentive for people to save for their retirement.
LV= head of equity release, Vanessa Owen, said: "The increase in the savings disregard for Pension Credit will go some way towards rewarding those pensioners who have saved their whole lives towards their retirement.
"By allowing pensioners to retain £10,000 of savings - yet still be entitled to Pension Credit, housing benefit and council tax benefit - it offers these people a greater opportunity to help and support themselves during later life, and reduces the financial burden on their children."
But there are others who believe the chancellor is not doing enough to help pensioners, who are being squeezed by high inflation and low interest rates.
A recent analysis from Capital Economics suggests inflation for pensioners could be running as high as 12 per cent.
Dean Mirfin, Key Retirement Solutions' group director, says: "On the face of it the announcements by the chancellor may appear to be generous towards pensioners, those who will really benefit though will be a distinct minority.
"The limit increase for those claiming Pension Credit will only benefit effect almost one in 20 of the retired population."
Michelle Mitchell, charity director for Age Concern and Help the Aged, adds: "Maintaining the Winter Fuel Payment, measures to help grandparents and help for low-income savers will provide cheer to pensioners in an otherwise gloomy Budget. But the failure to do more to tackle fuel poverty will continue to leave many pensioners out in the cold."
Child Trust Funds
One of the ways the government wants to encourage long-term saving is to help parents make the most of their Child Trust Fund (CTF).
Recognising that disabled children will need extra help, the chancellor announced an extra £100 a year contribution for children with disabilities, and £200 annually for severely disabled children.
David White, chief executive of The Children's Mutual, says: "This means that next year approximately 100,000 children will benefit from the additional annual payments of which an estimated 40,000 will qualify for the higher £200 allowance.
"An extra £100 a year paid into a Child Trust Fund could mean more than an extra £3,000 at age 18 and for the severely disabled children £200 a year could mean more than £6,000 extra."
John Reeve, chief executive of Family Investments, also welcomes the extra cash and says it will be "very important for their future".
"However, we would have liked to have seen the government provide more financial help for lower income families and those struggling with the effects of the recession.
"CTF take-up among lower income families is low, and the revenue still allocates about 20 per cent of CTF vouchers for those parents who don't invest them themselves.
Voluntary top-ups are still too low for the scheme to achieve what it set out to do and the government must act now to encourage further engagement with CTFs."
Help for 'ordinary savers'
While there is plenty here for savers on modest or low incomes, the people the government wants to help most, there is still mixed opinion on how much this Budget will help with everyday living.
There are still important changes that the government could make to ISAs, making them more flexible and increasing the cash limit to help cautious savers.
But the higher limit will be welcomed by savers who have felt marginalised in the banking bailout and ignored by politicians, although current low interest rates may mean the initial gains are limited.
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