Holders of Individual Savings Accounts (ISAs) have given up over £13bn in taxes, by failing to exploit their annual ISA savings allowances, according to the Yorkshire and Clydesdale Bank.
If next year’s increased ISA savings allowances are underutilised to the same degree, UK holders of ISA accounts stand to lose another £1.8bn in lost tax-free interest, according to the Bank.
Since ISA accounts were introduced 11 years ago, the average saver has paid just £2,500 into his ISA accounts – utilising less than half the annual allowance.
This year, holders of ISA accounts or those who make their first ISA investment before April can still take advantage of the ISAs allowances for 2009/2010.
This means they have scope to save up to £7,200 in the two types of ISA savings account. Half of this can be held in the cash ISA, and half (or all) in a stocks and shares ISA.
Cash ISAs
As a cash savings option, the cash ISA provides the best of both worlds: the security of the bank account, but the advantage of tax-free growth.
By using their cash ISA allowance each year, savers can quickly build up a nest egg with tax-free growth on their savings. This offers a considerable advantage over non-tax-advantaged savings accounts, such as the conventional bank account.
Stocks and shares ISA
The stocks and shares ISA offers tax-efficient (but not entirely tax-free) savings invested in the stock markets.
This ISA is a stock market investment, which makes it a little more risky than the cash ISA, but with the possibility of more attractive returns over the long term. Stock market investments have generally outperformed cash, if left invested in the longer term, preferably for at least 10 years.
An added attraction of ISAs is that the allowances are soon to be expanded. From April 2010, the overall annual allowance rises to £10,200, of which £5,100 can be saved in the cash ISA.
