Investors are failing to use their ISA allowances to the full.
Here's a quick question for you: How much will you be able to save in an ISA in the UK in the 2010-11 year? If you answered without looking it up, the chances are you got it wrong. At least, that's what the results of a survey carried out last month by a National Savings & Investments survey suggest.
The survey found that only 15% of those asked understood that the limits are being raised so that each of us can invest up to £10,200 in shares and pay no tax on any proceeds.
24% thought the limits were to remain the same, about the same again knew there were to be changes but didn't know what they were, and around 10% thought the new limits were for over-50s only (from April 5th this year, the allowances will be the same for all).
People just aren't using them
But perhaps more worryingly than that is the finding that 16% had shied away from ISAs completely, because they didn't really understand them and found them confusing, while 10% admitted that the idea of putting some money into an ISA just didn't occur to them. And only 16% said they plan to use up their full allowance.
Very few people are happy with the amounts of tax we have to pay these days, and it's generally pretty rare for anyone to pass up an offer of free money. But by not using your ISA allowance, you're turning your nose up at free money from the chancellor!
Now, a lot of people might say that with interest rates so low these days, they can get better returns on their cash by investing in, say, fixed-term bonds, rather than in a high street bank's cash ISA account, so it really isn't worth bothering about.
And I'd partly agree, low interest rates do indeed make cash ISAs relatively unattractive. But that's not where I think our long-term investments should be anyway -- and ISAs really should be seen as long-term investments, as the benefits of compounded returns really start to add up when measured over a couple of decades or more, rather than just a couple of years.
ISAs are best for shares
No, the whole ISA thing is shouting "shares" to me, because shares really do beat cash hands-down in the long run (and even though we've just been through a bad decade for shares, they have already bounced back quite a way from the recessionary depths, and in another decade the chances are they'll be racing ahead of cash again).
Unfortunately, it appears that most British savers disagree with me. According to HMRC's figures, the amount invested in cash ISAs consistently outstrips share-based ISAs (and that's even with cash ISAs having a lower limit).
In 2008-9, for example, while the great British public invested £9.4bn in share-based ISAs, three times as much (£28.1bn) was channelled into cash ISAs. And of the total of 14.2 million ISA accounts that were opened in the 2008-9 year, only 2.9 million were share-based.
Our preference for cash ISAs has been the same for the last several years as well. Indeed, as of last April, we had a total of £116.5bn invested in share ISAs and £158.1bn in cash ISAs.
But there is some good news -- the amounts that have gone into share ISAs so far in 2009/10 is likely to have been quite a bit higher, with a fair chunk invested at the low prices on offer last Spring and Summer.
Make haste...
So what's the best way to use up our ISA allowances? Well, the first thing to remember is that this year's allowance needs to be used by April 5th, and as that is Easter Monday, it would be advisable to get it sorted by April 1st (which makes it easier for Fools to remember anyway).
And what form of ISA? For me, a self-select shares ISA is the only way to go, and The Motley Fool provides a cheap and easy one. It works just like any other self-select broker's account, charging a flat fee of just £10 per trade for UK shares, and a management fee of £12.50 (plus VAT) every six months.
More from Alan Oscroft
> Time is running out if you want to use your tax-free ISA allowance for 2009/10. And remember, if you're 50 or over, your limit has now been increased to £10,200. Protect your investments from the taxman with a Motley Fool Self Select ISA.
