Last updated: March 5, 2014 4:51 pm

Isa guide 2014: Set your Isa free

Isa Money illustration

Individual savings accounts (Isas) are one of the UK’s most popular savings products. Almost half of all adults in England have one, and across the UK over £400bn was sheltered in 24.4m accounts at the end of the 2013 tax year.

But they are not so good that they couldn’t be better. For a start, too much money goes into cash, where it is less effective. For a higher-rate taxpayer, sheltering cash for a year in an Isa yields an extra £50 compared with a best-of-breed savings account – useful, but hardly transformational.

More

On this story

IN Money Guide: Isas

“It’s natural to move to a cash Isa when you first start out investing,” notes Mark Till, head of personal investing at Fidelity.

But where Isas really score is for investment, where income from dividends and coupons along with capital gains can roll up free of tax. The investment limit for stocks and shares Isas is also double that of cash Isas.

Yet despite these advantages, the market values of cash Isas are roughly the same as those of stocks and shares.

In the past tax year, 80 per cent of Isa subscriptions went into cash Isas, and Isa fund sales in 2013 – while better than 2012 – were behind 2010 and 2011 levels.

Although the Isa savings habit is commendably spread across income groups and geographical areas, as a nation we are still not making the most of this tax break.

Isa report 2014

Which Isa providers are best? What are the pitfalls of Aim share investments? And why do cash Isas remain so popular?

This FT Money special report covers a wealth of Isa-related issues as the end of the tax year approaches

Only 7 per cent of savers contributed the maximum to their account in the 2010/11 tax year, and 40 per cent of savers put in less than £2,000.

Even higher-income groups are not maxing out their Isas. Of those earning more than £150,000, only 43 per cent used their full allowance, although at higher earnings levels, stocks and shares Isas are much more widely used than cash.

The government estimates that tax relief on Isas costs £1.75bn a year, a fraction of the amount spent on pension tax relief. We should be making the Treasury work a lot harder.

AudioIsa special - Cash Isas, junior Isas, and where to invest

Why are cash Isa rates so low and yet so popular? This week's Isa special also takes a look at junior Isas, and Tom Stevenson of Fidelity talks about where to invest your allowance

Download mp3 Download

Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

Enter job search