As part of Morningstar's 2012-2013 Guide to ISA Investing Series, I spoke to Rob Fisher, Head of UK Personal Investments at Fidelity International, about the obstacles that young people face when it comes to saving, the benefits of ISAs as tools for flexible saving and investing, how ISAs and pensions can complement each other, and what types of investments a first-timer might want to look into. What follows are excerpts from our conversation.
What Are the Main Benefits of ISAs?
I think sometimes the basic message of ISAs gets lost. For me it’s a nice clean message that once you save or invest in an ISA you never, ever have any tax to pay on interest or returns. So typically stocks and shares ISAs, which investors tend to invest in via funds, are pretty attractive vehicles for that reason. There are subsidiary benefits, such as you don’t need to declare ISAs on your tax return, and they don’t cost any more [than investing in funds outside of an ISA].
A few years ago ISAs were arguably a little neglected, but now that ISA allowances are back above £10,000 per year—which is a reasonable amount of money whichever way you look at it, and you have that basic tax shelter feature, I think really they’re the first place of call for people saving or investing.
What Are the Main Obstacles to Saving for Young People?
It’s a shame because those that probably have the most to benefit from setting up a long-term investment, don’t seem to have picked up on it. I guess for some young people it’s the start of their working lives, they’re into paying down debt and credit cards, they have quite a number of expenses and so on. So I think it’s that basic question of affordability.
Also, the industry doesn’t do a great job of reaching out to the younger investor. That’s one of the things we have been focussing on for a while, whether it’s via digital media, Facebook, Twitter, and so on.
One of the things that we think will make a change going forwards is change in the workplace. Fidelity is in the process of rolling out a ‘workplace ISA’ to sit alongside a company pension arrangement. The coalition government is very keen on providing a nudge in the right direction and we think that a great ‘nudge’ when it comes to saving is if it’s taken from your monthly pay packet almost without you noticing. So workplace ISAs and pensions are a great way to get started in saving.
What Is the Key to Preparing for a Comfortable Financial Future?
I think people need to get over the shock that they’ve got to plan for themselves. Once you actually accept that you’ve got to take responsibility for yourself in terms of saving then the choice is really where to save and how to save. Saving on a monthly basis always strikes me as a very sensible way of doing it: you spread any risk of badly timing decisions if you’re thinking of getting into the stock market, i.e. you smooth out the peaks and troughs of the stock market cycle.
In essence the two main tax wrappers—the long-term pension or ‘locked box’ of savings and then the ISA or ‘unlocked box’—should sit alongside each other, and then it’s really up to the saver how much they want to put into either of those two boxes.
ISAs or Pensions, or Both?
It’s important that some people think about saving into a pension if only because the very nature of locking your money away is good because otherwise there’s always that temptation to put money in and then take it back, and actually you don’t build up a meaningful amount of money over the long term for your retirement.
ISAs can sit alongside that ‘locked box’—they still have tax benefits and they allow you to save at a pace that suits you: stopping and starting when you want; choosing what you put into it; tracking your ISA performance on the Internet; and ultimately letting you take control of your own financial future.
I think ISAs and pensions sit alongside each other quite nicely if you’re in the fortunate position to save in both. If you have to make a choice then it depends on individual circumstances. Most people that I talk to in this situation tend to prefer ISAs because they always know that if a rainy day turns up they can access their money. Pensions will remain a very attractive place for you to save, but I think ISAs perhaps pip them in their flexibility.
The way we’d like to see this world evolve is to make the relationship between ISAs and pensions a little more seamless. So you could put some money in an ISA when you started out, put some money into a pension as you become more established in life, and if you wanted to move money from an ISA to a pension you could do so without having any adverse effects on how much you can put in a pension otherwise. What we don’t want to do is penalise someone for being sensible and saving early on in an ISA.
Suitable Investments for a First-Timer?
Finding out a little bit about the range of funds on offer is always a good thing and there’s plenty of information and guidance online. If you are looking to be saving for 20, 30, 40 years then I would ordinarily argue for being quite aggressive in your choice of funds.
We often find that some of Fidelity’s more aggressive emerging markets/Asia/Latin America funds are quite popular for monthly savers on the basis that people think over the long-term emerging markets is where the future of the world economy is headed in terms of younger populations, access to materials, going into that growth phase. Clearly for some that’s going to be a little too high risk even for on a regular savings basis. But most models will lead you to go more into shares than fixed income if you’re looking over the long-term.
Another option is to pick a ready-made portfolio, such as target funds, which are effectively there to help people save for a future need. So, for example, you might know that in 10 or 20 years you’ll want to pay off part of your mortgage; these funds will take your money and as you near your target date they’ll gradually move your money out of equities and into cash or bonds so that as you near your goal your money is rather less susceptible to short-term moves in the stock market.
Alternatively there are multi-asset funds, which tend to move between stocks, bonds, commodities, property and cash depending on how the managers view the world economy. So they give you a broad spread and they come in different flavours of risk.
In general if you’re investing for 20 years plus, you can afford to be reasonably adventurous in your choice of fund, or fund of funds.
The original version of this article was published February 2011.
