icleID=51506&categoryID=14">Part III
addresses recent reforms to the ISA regime and whether or not they hit the mark; and Part IV discusses the future of ISAs.Despite their attractions as a tax favoured form of savings, ISAs are far from perfect and certainly haven’t been an unmitigated triumph in converting the Great British Public to a savings culture (Click through to ISAs: A Brief History to see why).
However, despite all of the criticisms and misgivings, it’s uncharitable to categorise as a failure an investment that has attracted around 17 million customers investing an estimated £200 billion plus. It probably is fair to say though, that the Cash ISA, which, despite its lower limit, has attracted around three quarters of the total investors and investment, has been more of an unmitigated success than its Stock-market counterpart. This may be due partly to the collapse in market confidence in the early 2000s and also to an innate risk aversion among UK investors.
However, it must also to some degree be attributable to lack of clarity in ISA rules and regulations and what, precisely, the tax advantages of the Stock-market ISA equate to for the average investor. It’s an easy choice to put £3000 into a cash fund that earns a good rate of interest on which you won’t pay tax, irrespective of your tax position; investing a similar amount – or even more up to £7000 – in a stock-market investment with the risk of losing money and with less clear-cut tax advantages, is another matter.
Cash isn’t the best home for most longer-term savings goals: investors holding their savings in cash may well face a signifcant erosion of the inflation-adjsuted purchasing power of their assets over time. So, there’s clearly still work to do to persuade investors of the real, long-term benefits of stock-market investment. Removing some of the complexity and opacity that has characterised stock-market investment generally and ISAs in particular would certainly help.
The Impact of the New ISA Rules
Despite their shortcomings, the changes announced recently do at least demonstrate:
- That the Government understands the need to make investing easier and that simplicity is generally better than complexity.
- That it is important to encourage long-term investment in areas other than cash (hence the ability to transfer previous Cash ISAs to a stock-market version).
- That, despite some “mixed messages”, the Government is committed to encouraging long term investment through tax incentives (hence the commitment to continue ISAs beyond the original 2010 deadline for new investment).
- That at least the Government is prepared to countenance increasing annual limits. This is only manifested in a marginal increase in the overall allowance at present, but at least it’s a start.
What Does the Future Hold for ISAs?
There has been a “change at the top” in the British Government and, as a result, a new incumbent next door at number 11: Alistair Darling. Whether this will lead to a new approach to the savings dilemma of too few people saving too little remains to be seen, but, it is a fair bet that there are those within Whitehall who are sympathetic to more innovative and radical solutions than the current ISA regime implies.
The new Personal Account born out of the Pensions Review of 2006 is due for launch by 2009 and, whilst detractors and sceptics abound, it should be seen as another attempt to encourage savings and, if it is anything resembling a success, it may open up the case for further leverage of the tax system to the benefit of savers.
As we set out in a previous article, we believe that new savings incentives need to be accompanied by a raising of the stakes in terms of consumer education in understanding the benefits of embarking on a long term savings programme now – and the potentially disastrous consequences of failing to do so. Too much that has passed for “consumer education” in the past has been shipwrecked on the rocks of technical jargon, unimaginative and dense content and a product promotion or sales-based motivation.
In the meantime, ISAs are here to stay at least for the foreseeable future. Although for many the tax advantages are modest, for most investors, using their ISA allowance should be an early savings or investment priority each tax year. Whether or not the Cash or Stock-market route – or a mixture of both – is right for you will depend on individual circumstances and we always suggest that you discuss your investment needs with a Financial Adviser before taking action.
* IMA Statistics Dec 2006
