Savers benefit as ISA allowance is raised to £10k

Last week saw chancellor of the exchequer Alistair Darling deliver a grim Budget 2009 that despite being designed to help Britain get back on its feet, also paved the way for measures that are set to benefit savers.

Over the last few months the Bank of England has cut interest rates to all-time lows in a bid to minimise the effects of the global economic downturn on the economy, which has hit savers particularly hard.

The Bank's Monetary Policy Committee has overseen the cutting of interest rates from a high of five per cent in October to the historic low of just 0.5 per cent, a move that would have been out of the question in different circumstances.

While some consumers, notable those paying back mortgages, welcomed the rate reductions, many savers were left with a bad taste in their mouths as savings accounts suffered with reduced interest payments.

However, some of the proposals laid out by Mr Darling in his Budget last week brought some good news to savers as he announced that the next two years will see the individual savings account (ISA) allowance increased for all savers.

Mr Darling pledged to increase the amount consumers can save without attracting tax in an ISA from £7,200 to £10,200, with it being possible to save £5,100 of this in cash.

A cross-section of savings providers welcomed the news. Halifax, which is the largest among them, said the development would benefit many savers.

"[The] decision to increase ISA allowances will be welcome news to savers who have seen their returns reduced significantly following a succession of base rate cuts," explained Flavia Palacios Umana, the head of Halifax savings products.

She said: "Now is a challenging time for savers, especially for pensioners who rely on returns to supplement their monthly income, and we are fully behind this move by the chancellor to help savers make more of their money in this historic low rate environment."

Nationwide Building Society also concurred but said more measures still need to be implemented to encourage consumers to not only save money, but also understand the importance of doing so.

"Linking the ISA subscription limit to inflation would provide an added incentive for consumers to save," said the organisation's head of savings Lee Raybould.

He added that "increasing the flexibility of ISAs would offer greater support to those consumers who need to dip into their savings or those who are currently struggling to save their full allowance".

Designed to speed up UK economic recovery, Mr Darling's Budget, which was delivered in the midst of a global recession, laid out plans to borrow more money over the next few years, with the figure this year expected to be a record £175 billion.