A finance expert has branded ISAs – the government’s tax free saving scheme – as “pointless” as they mainly only benefit the rich.
ISAs are used by millions of middle income families as a method of saving without paying tax on interest earned.
Financial expert Paul Lewis told a Resolution Foundation panel that ISAs are a flawed policy as they benefit “high income individuals who really don’t need additional government support to save”.
A report by the Resolution Foundation think tank released on Monday found that the wealthy were benefiting from ISAs by not paying tax on six figure sums, while those earning less, or with less savings, were not seeing any benefit.
The think tank recommended a cap of £100,000 on the total amount on ISA savings that are tax-free, a policy it said could raise around £1 billion per year, and “allow scarce resources to be focused on the around 750,000 families with no savings at all”.
Discussing the Resolution Foundation report, a panel of experts urged the government to take steps to enable middle and lower income families to save effectively.
They suggested that accounts should be automatically opened for recipients of Universal Credit, with an initial starting bonus.
The report noted that savings allowances do allow basic rate taxpayers able to earn up to £1,000 in savings interest untaxed, compared with £500 for higher rate taxpayers. But it said support is “skewed towards wealthier savers”.
For working-age adults, around £3 in every £10 saved in ISAs is held by people in the top 10% of incomes.
The Help to Save scheme – where people are able to save up to £50 a month and receive a top-up from government – is targeted at low-income families, with eligibility being determined by receipt of benefits.
But the foundation said take-up of the scheme is low, with fewer than one in 10 eligible participants using it.
While this may reflect many benefit recipients being unable to save, people who do engage with the scheme appear keen to save as much as possible, with 92% of monthly Help to Save deposits at the maximum value of £50, the foundation added.
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The report said Chancellor Jeremy Hunt should consider overhauling savings policies and focus on encouraging more people to save rather than rewarding those who already have very significant savings.
It said: “Taking the existing schemes together, current policies are either poorly targeted with significant deadweight cost, particularly all forms of ISAs, or are too small in scale to achieve a significant broadening in the distribution of household savings [such as the Help to Save scheme].”
Molly Broome, an economist at the Resolution Foundation, said: “Britain is not a nation of savers. This lack of financial resilience has left many exposed during the cost-of-living crisis, with families having to build up debts and fall behind on bills.
“Government incentives to save do exist but are not fit for purpose – prioritising tax reliefs for those with very large amounts of savings over supporting real increases in the numbers of people with savings.”
What is an ISA?
An Individual Savings Account (ISA) is a savings account where you don’t pay any tax on the interest you earn.
Each ISA has an investment limit per year.
There are two main types of ISA to choose from cash-only, and stocks and shares.
There are other more specialised options available.
