The savings industry today gave a mixed reaction to news in today's budget that from April next year Isa limits will automatically increase in line with inflation.
Since October last year savers aged over 50 have been able to put up to £10,200 a year in the tax-free savings wrapper, £5,100 of which can be held in cash, and, as announced in last year's budget, this will come into effect for everybody from 5 April this year.
The new measure, part of the chancellor Alistair Darling's budget statement, will see Isa limits change annually in line with inflation. However, at current savings rates the uplift will benefit savers by only a few pounds.
"This is a token gesture that is likely to cost providers more to administer than it will actually deliver to beleaguered savers," said Andrew Hagger, spokesman for financial products price comparison service Moneynet. "Focusing purely on the cash element of £5,100, if the next inflationary increase is, say, 2.5%, then the allowance will increase to £5,227.50."
Savers who put this extra £127.50 allowance in an Isa paying 3% will earn an extra £3.83 in interest as opposed to a normal savings account paying 3%, where they will receive a net return of £3.06, he added. The tax-free benefit for a full year would therefore amount to 76p.
Trade association the Tax Incentivised Savings Association (TISA) was more positive about the news.
"The big uplift in subscription limits this year is extremely welcome but we have long argued for a regular increase in Isa subscription limits and this decision allows savers and the industry to plan ahead with certainty," said Tony Vine-Lott, director general of TISA.
The revised limits will be based on September's RPI figures and announced in October each year and will be rounded up so that they are divisible by 12 to make it easy for savers to continue with regular monthly contributions, he added.
The government introduced Isas in 1999 and since then they have proved extremely popular; over 19 million adults hold almost £275bn in Isas.
However, abysmal interest rates on both Isas and other savings accounts have plagued savers since the Bank of England base rate dropped to 0.5% a year ago.
In early 2000, for example, internet bank Smile's cash Isa was paying 7.25%. Ten years on, the rate is 0.31% if you don't have a Smile current account, and 0.5% if you do. Recent research by website Moneysupermarket indicated that, partly as a result of these poor rates, almost four in 10 savers were set to turn their back on Isas this year.
