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Drop ISAs, argues think-tank

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One of the most popular savings accounts of recent years should be scrapped, a leading think-tank has said.

Despite their success in attracting hundreds of million of pounds, Individual Savings Accounts (ISAs) have actually failed to promote the idea of saving, the Institute for Public Policy Research (IPPR) has claimed.

ISAs, which offer tax-free savings, were first introduced in 1999 to encourage more people to put money aside for rainy days and retirements. The accounts have been used by millions of savers.

However, the IPPR pointed out that over a half of households in the UK still have inadequate savings. Among low to middle-income families, only 50 per cent have stashed away enough to cover just one month’s gross income.

The lower down the income ladder, the bleaker the picture gets. Of those households on a weekly income of less than £600, only a third have invested in a cash or stocks ISA.

As for the incentive of the tax breaks afforded by ISAs, the IPPR said that most of the tax relief ends up with people who would have saved money anyway.

With predictions suggesting that saving is likely to become an ever more endangered activity in the future, the IPPR put forward the case for abolishing ISAs and introducing in their place a “lifetime bonus savings account”.

In the new account, a bonus would be paid on a sliding scale, aimed at promoting saving. The bonus system would start at £1 for every £10 invested in the account up to the first £1,000. Once the balance of the account reaches £3,000, the bonuses would be capped.

Nick Pearce, the IPPR’s director, said: “Our research shows that people on low to middle incomes want simple savings accounts with few terms and conditions, little in the way of small print and paying an easily understandable reward.

“The current tax relief given to higher-income earners could be withdrawn without reducing their propensity to save. Instead, these funds could be used to increase saving by low to middle-income families and boost aggregate saving to improve the UK’s saving ratio at no extra cost to the government.”