90% of savers do not know what the new personal savings allowance is

13 Mar, 2016

With just a few weeks to go until the personal savings allowance (PSA) comes into effect, new research from AA Financial Services reveals that 90% of savers don’t know what the allowance is and are struggling to determine where to put their savings after April.

Once the PSA was explained to survey respondents, almost half (49%) said they didn’t know what to do with their money come April, with the choice between ISAs and savings accounts causing most confusion.

One in six (16%) savers said they would only pay into a savings account  from April, and one in 14 (7%) said they would move money out of their ISA and into a savings account.

A spokesman for AA Financial Services, said, “The personal savings allowance is good news for savers, but widespread confusion about what it means for people’s money risks undoing the benefits.

“There will continue to be many differences between savings accounts and ISAs and the decision on what to do with your money isn’t as simple as comparing rates between saving accounts and ISAs.”

Important considerations for savers include:

  • How an increase in interest rates will affect them.  For example, a basic rate taxpayer with £50,000 in a savings account earning 2% will generate £1000 interest – meaning all interest is protected by their PSA.  However, on the same balance, if rates increase to 3% they’ll generate £1500 – meaning £500 worth of interest will become liable to tax.
  • How a pay rise could affect the value of their PSA.  A pay rise that takes you from a basic rate tax bracket to a higher rate tax bracket would halve your PSA from £1000 to £500.
  • How they’d like to build their savings over the longer term.   For example, each tax year savers get an ISA allowance (currently £15,240 in 2015/16).  Consistently using your full ISA allowance over many years means you could build a substantial savings pot protected from both income and capital gains tax.
  • How ISA allowances can now be inherited. A deceased spouse can now pass on their ISA allowance to their surviving partner, which they can use on top of their usual ISA allowance.

In spite of the confusion, there is a general willingness to save, with almost one in four (23%) people expecting it to be easier to save over the next few months.