Thursday, 23 February 2012

Virgin Money diddling savers

From here [current], Virgin Money are attempting to get those who have money they want to put into an ISA next tax year (April 6th 2012) to save with them now:

Virgin Money encourages the Early Birds

Virgin Money have continued their mission to make banking better[1], with details of a new ‘Early Bird ISA’[2] being released.

Those of you who currently have an ISA will be familiar with the limitations of only being able to put a certain amount in the account each year, making planning ahead that little bit more difficult.[3]

As a keen innovator[4] Virgin Money has sought to bypass this problem by allowing customers to open a savings account now and load next year’s ISA limit into it, with the bank paying the same interest that you’d get in a tax free ISA.[5]

Once the new tax year begins on April 6th Virgin Money simply drop your savings (and any interest accrued) into your ISA, the Early Bird ISA pays an equivalent rate of the Virgin Money ISA[6] – both of which are tax free.[7]
For those not au-fait with what cash ISA's are, and can't be bothered clicking the wiki link above, all interest on 'normal' cash savings in the UK is taxed at the marginal income tax rate of the person earning that interest. Typically this is 20%[8]. So, if you earn £100 interest on your savings, £20 will be deducted at source.

ISA's pay their interest gross, i.e. the interest isn't taxed at source, and it doesn't need to be declared to HMRC. The amount you can save per year is limited (£5,340 for 2011/2012) on a 'use it or lose it' basis.

[1] Well they can't do much worse than Natwest's 'helpful banking' I suppose...

[2] I think the ASA might have something to say about the naming of this - it's patently not an ISA.

[3] Seriously guys, it's a bit patronising to accuse your (potential) customers of being thick/unable to plan if they're actually able to accumulate savings (i.e. plan ahead) to put into the next year's ISA before they 'open.'

[4] A previous innovation was to offer only current accounts that charge £60/yr. The next innovation was to offer fee-free accounts after they were criticised for their last innovation.

Another innovation is their rather expensive tracker fund [current] that costs 1% per year. Three to four times as much as cheaper funds that do exactly the same thing.

[5] This is where the bollocks comes in. The whole point of ISAs is to get interest tax free. So in theory, banks should provide savings accounts with the same rate across the board. For example, if BarcWest Bank decides to offer savings accounts at 4%, they'd offer a regular savings account where tax is deducted at source (net of 3.2%), and an ISA savings account where tax isn't deducted ('net' 4%.)

What Virgin are doing is offering, is the equivalent of a regular savings account at 4%, and ISA savings accounts at 3.2%.

[6] Despite my illustrative examples above, Virgin are only offering 2.85%[current]. Inflation is currently running at 4.8%. Best instant access ISA I could find at the time of writing elsewhere is 3.10%[current]. Virgin being innovative again it seems, by having a crap rate.

[7] No, no, no! They are not both tax free. The 'Early Bird ISA' is not tax free - I'm assuming they've simply upped the taxed account's rate such that the net it pays is the same as it would be if it was in an ISA.

Presumably this is just for 20%er's - they don't go into detail about the 40/50%er's who have to fill out self-assessments and fork out the other 20% at tax-year-end.

This is akin to the "we'll pay your VAT" adverts that are seen - VAT is still payable on the (new) sale price - it's simply that the sale price has been reduced to the pre-VAT value on the original price.

[8] Higher rate tax payers pay 40% or 50% depending on their income, and a small proportion of people only pay 10% if savings interest is their only income up to a certain amount.

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