By Kevin Peachey
Personal finance reporter, BBC News
Low interest rates have cut returns for many savers
The amount of money that people can save tax-free in an Individual Savings Account (Isa) is going up.
From 6 October, the tax-free allowance will rise for everyone aged 50 and over, with younger savers benefitting from the change in April 2010.
In low-interest times, the government wants more reward for those who have saved, but some "grey areas" in the new rules have already emerged.
How will things change?
The amount people can save in an Isa will rise from £7,200 to £10,200, of which half can be saved in cash and half, or all, in stocks and shares.
The new limit comes into force on 6 October for anyone born on or before 5 April, 1960. For everyone else the limit will rise from 6 April, 2010.
There are an estimated 21 million people aged over 50 in the UK, and they tend to be more likely to save as they approach retirement.
Isas were introduced 10 years ago by then-chancellor Gordon Brown in an attempt to encourage UK residents to get into the savings habit.
They have proved popular, with about 19 million Isa account holders in the UK, with five million using the full allowance each year. About 10 million Isa holders are aged over 50.
Each person is only allowed to open one cash and one stocks and shares Isa each year, with the same or different providers.
How will this look for my personal finances?
This obviously depends on the level of interest rates over the coming years.
The new limit means that somebody aged over 50 can put £425 a month in cash into their Isa, without paying tax on the interest they earn.
This, according to price comparison website Uswitch, means that the average 50-year-old who took full advantage of the allowance could save £105,000 by the time they reached retirement age.
Over that 15-year period they would earn the equivalent of £1,852 each year - £154 a month - in tax-free interest.
These calculations assume that the interest rate would be set at about 4%. At present, the best deals are more likely to be around the 3% mark, according to financial information service Moneyfacts.
What does the government say about the changes?
Chancellor Alistair Darling announced the plan in this year's Budget.
"This will enable people who have retired or are beginning to prepare for retirement to move taxed savings into a tax-advantaged Isa, rewarding those who have saved by improving their returns," the Budget papers explain.
"The government also recognises that people need to be supported to save as the economy emerges from the downturn. The government will therefore extend these increases in the Isa limit to everyone from 6 April 2010."
What does everyone else say?
Rather a lot; it seems many different providers and pressure groups have an opinion.
The view that not enough people know about, or understand, the changes in the limits tends to come from providers of Isas.
The opinion that relatively few people switch their Isa provider comes from one online switching service.
However, there is a general consensus that a mini-Isa war could break out among providers who want to seize more customers in the new Isa age.
So nothing can go wrong?
Not quite, because a few problems and grey areas have emerged.
Some concerns have been raised that not all bank and building society staff have completed training in the new rules, although the financial institutions say they will be ready in time.
Fixed-rate Isas usually offer a better rate of interest because savers are unable to access their cash during the financial year.
However, there has been some confusion over whether people will be able to top-up their fixed-rate Isa when the new limits are available from 6 October.
Ultimately, this is a choice for the providers.
Some will allow a top-up to variable-rate Isas, but not to fixed-rate products. Others will allow fixed-rate top-ups because the change is considered an "exceptional circumstance".
Other providers will allow people to open a parallel extra Isa, where they can save up to the extra £1,500 cash allowance, but the interest rate will be set at the level offered on the day - not the level offered earlier in the year.
Can I move between providers?
Some providers are offering better deals now than they were at the start of the year. But, it is worth checking on any deal because there are some penalties for those who switch providers before April.
Those intending on taking advantage of the increased stocks and shares Isa allowance might consider taking some professional advice on where to invest.
Can I have some examples of how all this will work?
HMRC have outlined the following scenarios:
- An individual is aged 65. He has not opened an Isa in the tax year 2009-10. From 6 October, 2009, his ISA allowance will be £10,200. Up to £5,100 of his allowance can be saved in a cash Isa with one provider. The remainder of the £10,200 can be invested in a stocks and shares Isa with either the same or another provider. Alternatively, the full £10,200 can be invested in a stocks and shares Isa with one provider.
- An individual is aged 70. She has opened a cash Isa in 2009-10 in which she has subscribed £3,600. From 6 October, 2009, she will have an Isa allowance of £10,200. She could save up to another £6,600 in Isas. This could be up to £1,500 in the same cash Isa, or up to £6,600 in a stocks and shares Isa with either the same or another provider, or a combination of both.
- An individual's 50th birthday falls on 15 March, 2010. He has opened up a stocks and shares Isa in 2009-10 in which he has subscribed £7,200. From 6 October, 2009, he could save up to another £3,000 in Isas. This could be up to £3,000 in the same stocks and shares Isa, or up to £3,000 in a cash Isa with either the same or another provider, or a combination of both.