How can savers and investors make the most of their ISA allowance? Read our special report to find out.
It’s been 20 years since Personal Equity Plans were transformed into the Individual Savings Account. No longer did investors need to decide into which company’s shares they should invest £3,000 into their Single Company PEP, alongside the £6,000 they could invest in a General PEP. Looking back, to my mind it was less-than-ideal risk management to encourage investors to put one third of their annual tax-free savings allowance into just one company’s shares.
The advent of the ISA brought simplicity to investing, in that it offered one tax-free account with an annual limit that has risen each year. We have some newer variations on the theme— such as Junior ISAs and Lifetime ISAs — but has the ISA actually encouraged more interest in personal investing?
According to the Office for National Statistics, the number of ISA accounts has been falling since the global financial crisis. Although the number of stocks and shares ISA accounts has hovered around the 2.8 million mark, investors have favoured the Cash ISA, where the number of accounts is much higher. The average subscription has increased, but it’s likely the same people subscribing each year to take advantage of the tax-free allowance, given the fairly static number of accounts.
However, the fund industry has seen a proliferation of new offerings in the last 20 years. In February 1999, there were nearly 1,200 actively managed UK domiciled funds; fast forward 20 years and that number has increased more than six-fold, to more than 7,900. The increase in passive funds is a staggering 45 times, and that’s without including ETFs; but that growth can be attributed to the Retail Distribution Review and unbundling of the cost of investment advice.
While the fund industry has been creating ever more ways to tempt investors with their savings, it hasn’t really caught their imagination or interest in a significant way. The Cash ISA is still the preferred choice for a majority, even some 20 years on. ISA providers are offering interest rates that are significantly higher than the Bank of England base rate, with ease of withdrawal should that money be needed at short notice.
We have a long way to go to convince ordinary people of the merits of investing through an ISA. Tax-free savings, monthly contributions, compound returns — we must do more to educate investors of these benefits and help them in their quest to reach their financial goals.
