BLOG: Tax-free ISA interest remains a crucial resource for savers
There is no doubt that the Covid-19 pandemic has had a profound impact on the way many of us approach our finances. While lockdown has proved financially challenging for a lot of British savers, others have found themselves in a more advantageous position thanks to reduced spending and lower living costs.
A staggering £22.6bn has been put away into easy access saving accounts between February and May 2020, an increase of £15.8bn compared to the same period in 2019.
While it remains to be seen whether the pandemic has triggered a long-term shift in attitude towards saving, in the short-term, this has led to many clearing debt and putting some money aside for a rainy day.
However, although this trend has led to a steep rise in saving accounts deposits, this has not translated into more ISA savings.
The number of ISA account openings has halved between February and May this year, compared to the same period in 2019, and overall deposits into ISA accounts have reduced by a third year-on-year.
Interestingly, the decline of ISAs isn’t a homogeneous trend and certain product types are seeing strong growth, despite the market downturn. Although easy access and fixed rate products are experiencing a decline, notice ISAs, for example, are on the rise. This micro-trend illustrates that savers have more complex and nuanced requirements than before.
Many are facing financial uncertainty and are therefore more reluctant than before to lock money away, while difficult market conditions have also heavily impacted rates. A notice ISA offers a ‘halfway house’, providing a better interest rate than an easy access option, while offering more flexibility than a fixed rate product.
In fact, this need for flexibility has become a key driver and differentiator for saving products in the wake of Covid-19, and something financial providers need to acknowledge and deliver in order to maximise their product offering.
The downward trend is also not consistent across the market. Paragon is one financial provider that has seen a strong ISA season this year, with a 65% increase in account openings compared to last year. We have also seen requests for ISA transfers double between February and May 2020 compared to the same period in 2019.
I would urge savers not to overlook ISAs. In the current market conditions, it might be tempting to give in to inertia and feel like there is less incentive to move money around and hunt for the best deal. However, tax-free interest remains a crucial resource when it comes to maximising the return on savings now and in the future.
I would encourage savers to review their account portfolio and consider how opening an ISA might help them stretch their interest a little further. It’s important for savers to really consider their needs, including what level of access they require on their savings, how much they can afford to lock away, and whether they want to set up an emergency fund that they can access easily without penalty.
Once they’ve considered those needs, they can identify the exact type of ISA that suits their requirements. If their needs are more complex and varied, it’s worth thinking about the best way to split an allowance between products offering varying levels of access.
Tax-free savings continue to offer excellent value for savers, especially those in higher tax brackets who don’t benefit from the Personal Savings Allowance.
In the current climate, it’s important for people to ensure their savings are offering the best return possible. Putting money aside tax-free is a really simple way for people to make their savings work a little harder over time.
Derek Sprawling is savings director at Paragon Bank