It’s nearly the end of the tax year – but before getting stuck into next year’s investments, do consumers really understand how your Isa works?
Since its introduction, the Isa has proved to be one of the most popular savings vehicles of choice.
Every year, in the run up to the end of the tax year, savers continue to put billions of pounds away. Figures from HMRC show that in 2014/15, around 13 million adults subscribed to an Isa and since they first became available on 6 April 1999, almost £500bn is held in Isas.
Even for those who remember Peps and Tessas, the long term success of ISAs has largely been down to the fact that many savers have a good understanding of how they work and it has broadly stayed the same.
Yet, while many of us will look to take advantage of this year’s annual allowance, for many, savings is not as straightforward as it seems. Banking is a world shrouded in jargon and numbers. We have to recognise that consumers may not understand the difference between AER and APR or an easy- access account and a fixed-rate account.
We have conducted research asking savers if they knew what everyday savings terminology actually means. Almost six-in-ten (59 per cent) failed to identify AER as Annual Equivalent Rate, while only around half (54%) correctly identified the Isa as an Individual Savings Account.
Savers were also asked to identify the correct amount of gross interest earned from placing £100 into a two-year fixed rate savings account paying three per cent per annum. Some 68 per cent failed to get the correct answer that they would earn £6.09, with just 29 per cent suggesting it was £6.
Perhaps most importantly, the research highlights what effect this lack of understanding has on respondent’s ability to save. While just under a third (32 per cent) said they fully understood how savings account work and what they’re likely to earn, 31 per cent said they put money away because they think it’s important, but don’t fully understand the terminology.
The low rate environment will have an impact on the amount and the will for people to save. However, it’s interesting to see that if a significant number of savers do not fully understand all the rules, then they ultimately may not be getting the best rate.
There remains a question to how much communication and information is being provided by banks and building societies. While most would be unsure on technical issues such as the timeframe for transferring an Isa to another provider or the annual allowance of a Junior Isa, savers are ultimately losing out if they aren’t being fully informed on details on a product.
While only four per cent said it would stop them from saving altogether, almost four in ten (38 per cent) savers said in the event of them being unable to find sufficient information they would move their savings elsewhere. Savers who do shop around are finding new entrants provide more competitive rates and better service, including newer products such as ‘flexible Isas’, making the penalties for those who miss out twofold.
Isas may continue to be popular in the long term but only if savers are able to get better value from the products and through better rates.