Savers are shunning individual savings accounts (Isas) in favour of ordinary funds, figures from the Investment Management Association have revealed.

Net sales of stocks and shares Isas were just £88 million in February, down 40 per cent on the previous February.

These Isa sales figures were dwarfed by those for funds as a whole. Private investors bought a net £973 million of funds in February and net fund sales have broken the £1 billion barrier seven times in the past 12 months. In contrast, net Isa sales have struggled to top the £100 million level. This year’s deadline for putting money into the tax shelter of an Isa falls at midnight.

The fact that 90 per cent of net fund sales in February were outside Isas shows that investors remain sceptical about their merits, despite improvements to the regime that will take place from April 2008, including a rise in the annual Isa limit from £7,000 to £7,200.

The key reason that investors are turning their backs on stocks and shares Isas is that since April 2004, they can no longer reclaim the tax credit on equity dividends. However, Isa managers said that there were still good reasons to make use of what remains a tax-efficient form of saving. There is no capital gains tax to pay on your Isa profits and bond investors within an Isa receive a rebate of the 20 per cent tax deducted on their interest payments.

Although they cannot claim back the tax credit on equity dividends, higher-rate taxpayers face no additional tax on these payments, whereas outside an Isa they would face a further 25 per cent tax charge. There is also no need to include details of your Isa investments in your tax return.

Richard Saunders, the chief executive of the IMA, said: “It is to be hoped that the welcome announcement in the Budget . . . together with the overhaul of the system, will go some way to restoring confidence in the Isa.”

The sector that notched up the highest net sales to individuals in February was the specialist sector, with property funds the most popular.

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