ISA Madness

Well, here we are again at the end of another financial year. The difference this time compared to previous financial years is that this particular financial year has been an unmitigated disaster with the brunt of said disaster being born by poor ol’ Joe PUblic. Joe has seen his so-called professional institutions fail him abysmally and, just to rub salt into the wounds, he’s had to endure those most responsible  being handsomely rewarded for their abject failure. If Joe had failed in his job, of course, he would have been summarily dismissed. Such is the justice of the corporate world.

As is traditional at this time of year, our beloved professional financial idiots are all vying to pay us a miserably low interest rate on both this year’s and next year’s ISA allowance. I’ve just been looking at the Nationwide’s web site where their so-called Member’s ISA Bond offers to pay a paltry maximum (for balances in excess of £25000) of 0.75%. This generosity apparently rewards those who have been members for 3 years or more. Wow! I can hardly contain my excitement. The Nationwide instant access ISA offers a derisory 0.25%0.50%, the upper figure again being for balances exceeding £25000. Ye Gods, for £25000 they actually deign to pay us the bank base rate. How very bloody generous! Anything less and you don’t even get the pathetic base rate.

Derisory returns aside, though, here’s what really ticks me off. This phenomenon is something that I’ve suspected for a while but not actually investigated. An ISA is supposed to be a tax saving for the consumer. The long-suffering Joe Public is said to get the interest tax-free. It’s a pretty simple concept. Once again drawing on the Nationwide’s site, if I am prepared to tie my cash up for various periods, I can take out a fixed-rate cash ISA bond with a maximum return of 3.25%. Well, great it may not be compared to recent years but it’s a whole lot better than 0.5%.

Hang on though, Nationwide also offers fixed-rate bonds (note the lack of the term “ISA” in the title), once again of varying terms. Upon investigation, the fixed-rate bonds appear to be able to pay out up to 4.15%. Curious! Even a finance non-professional such as myself can quickly deduce that 3.25% (the maximum ISA payout) is disturbingly close to 4.15% once basic rate tax has been deducted. I’m not supposed to have to pay tax on the ISA, though.

If an organization can offer a tax-paying bond at 4.15% why on earth can it not offer the same level of return on a tax-free ISA? I should be able to have a cash ISA at 4.15% as well. It shouldn’t affect the financial organization whether tax is paid or not. The only loser should be the blasted tax man. Sadly not, it seems. Old Joe would be just as well taking out a regular bond and paying basic rate tax as he would taking out an ISA supposedly tax-free. OK, admittedly those in the higher rate tax bracket win. Now there’s a surprise: to those who have shall more be given – once again.

The only loser is, in fact, Joe Public who, yet again, is being royally shafted. The wool is pulled firmly over his eyes and the much advertized tax-freeness is quite clearly mythical.

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