Did you close down your Northern Rock ISA
November 23, 2007
The recent turmoil to hit the financial markets in the UK and worldwide has affected many financial companies, and one of the major UK victims of this turmoil is Northern Rock.
The lender, which was the fifth largest mortgage lender in the nation, was forced to go to the Bank of England for a loan recently, but once this became public knowledge there was widespread panic amongst the customers of the bank, who were worried that the bank was on the verge of collapse.
Northern Rock had 1.5 million savers before the tragedy hit, but after hearing the news about the bank having approached the Bank of England for a loan. However, after hearing the news and panicking that the bank may be about to fold many of these savers decided to withdraw their savings, and for a few days people were queuing around the block in order to take their money out of Northern Rock. Over £2 billion was withdrawn in total from the bank over the space of a few days, and share prices plummeted in the same period.
Amongst those that withdrew their cash from the stricken bank were ISA holders. ISAs allow customers to save up to £3000 in cash each year and enjoy earning interest without having to pay any tax on it. However, many of those that closed down their ISA accounts had been savings for years, and had been putting in the maximum amount allowed each year, thus had built up a tidy nest egg on which they did not have to pay tax on their interest. By emptying their ISA customers risked being unable to re-invest the money in another ISA other than the £3000 allowed.
However, the Treasury has now decided that customers that closed their ISAs between 13th and 19th September, which is when the chaos hit the bank, will now be able to reinvest the money that they withdrew in full and will not lose their tax free benefits. Savers will have two choices – they can reopen their ISA account with Northern Rock if they wish, or they can open an ISA with another provider. In order to do the latter savers will have to get confirmation of the amount that was withdrawn from the account from Northern Rock, and this will have to be presented to the new provider. Account holders will have until 5th April next year to act to benefit from this.
As a result of the Northern Rock crisis the Bank of England also decided to increase the amount of savings that would be guaranteed if a similar incident occurred in the future, and hopes that this will help to reduce the risk of a similar incident occurring in terms of mass withdrawals being made from a bank that runs into trouble. The guarantee of 100% has been placed on the first £35,000 of savings, although originally there were talks of increasing this to £100,000. One Treasury spokesman stated: “The danger of making the guarantee too high is you are providing an automatic guarantee for people who are quite wealthy, whereas people sitting in a pension fund have got very much less protection. There is a sense of inequality.”
Alan Wright
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