April 2019 marks the 20th anniversary of the Individual Savings Account – better known as the ISA.
Since its introduction, £8.74 trillion has been put into ISAs, and an estimated £30 billion has been saved in income tax alone, according to UK investment firm Hargreaves Lansdown.
Where did it all begin?
The ISA was created in 1999, replacing the Personal Equity Plan (PEP) and Tax-Exempt Special Savings Accounts (TESSA) – the former being similar to a Stocks and Shares ISA and the latter today’s Cash ISA.
What is an ISA?
An ISA is a tax-friendly way of saving money. There are different types of ISAs to invest in: Cash, stocks and shares, innovative finance, junior, help to buy and lifetime.
When ISAs first arrived, the maximum you could put into a Cash ISA was £3,000. Today the amount is £20,000 (up from £15,240 in the 2016/17 tax year).
Rebecca O’Keeffe, head of investment at interactive investor says: “With the turbulent UK political situation, it is more important than ever for investors to be tax efficient with their investments. Over the long term, ISAs provide significant benefits to those investors who are able to accrue large holdings giving the potential to provide a steady income that is free from any further tax.
So how much could you have made if you invested in an ISA from the beginning?
According to Sarah Coles, personal finance analyst at Hargreaves Lansdown, if you’d invested your full allowance since launch in the Legal & General UK Index Tracker you would have invested £211,320 and be left with a nest egg of £341,982.
Coles says: “20 years later, they’re [ISAs] going from strength to strength – and have saved us over £30 billion in tax along the way. They’re a first port of call for the vast majority of investors, and a valuable tool for savers – particularly higher rate taxpayers and those who are hoping to build large cash balances. They form the foundation of millions of portfolios, and will continue to do so for another 20 years.
“Over the years ISAs have evolved substantially for the better – with increased allowances, better tax breaks, more flexibility, a wider range of investment options, ISAs for children, and ISAs with government bonuses to help people onto the property ladder.
“Of course, they’re not perfect. Given how the number of ISAs has expanded over the past few years, they are crying out for streamlining and simplification to help people get to grips with the benefits of ISAs without being confused into paralysis by the proliferation of choice.”
Chris Ball, managing partner, Hoxton Capital Management says: “Given that in the UK there is a savings shortfall in the billions and pension deficits are in the trillions, anything that encourages people to save can only be a good thing. As with any savings vehicle the performance is dependent on the underlying investment and the risk tolerance of the investor, as such some will perform better than others.
“The average stocks & shares ISA’s have seen healthy growth over the last couple of years with typical gains of 15% from 2017-18.
“Returns on cash ISA’s have not been so fruitful thanks to low interest rates, with the average returning 1% and not out-performing inflation. Maybe the security cash ISA’s offer will become more appealing as we head into what we are predicting to be a volatile year for markets.
“Either way, having an easily accessible and tax efficient savings solution is key to helping people get closer to having what they need for a comfortable retirement, and any savings whether they grow at 15% or 1%, are better than none.”
Source: Hargreaves Lansdown
Jamie Smith-Thompson, Managing Director at Portafina, said: “The fact that ISAs are still around and have not disappeared from the market tells us that people are still getting use from them. Thanks to tax-relief on any interest there are clear benefits from putting your savings into an ISA. There are different types to choose from so thinking about what you want to achieve from your ISA savings is key.
“ISAs do a job. And while the returns you get are often limited, that’s more to do with the economic conditions than an inherent need for change.
“A cash ISA can be great for the short-term, such as saving for a holiday. But if you’re looking to save over a longer period, say for your retirement, then you could earn a better return with a stocks and shares ISA. If you’re thinking pension vs ISA, then speaking with a regulated financial adviser about your plans will help determine what savings route should give you the best possible future.
“While ISAs are more tax efficient than a standard savings account, the tax benefits associated with a pension make it the most powerful savings tool most of us will ever have.”
What is next for the ISA: our 5 proposals to improve ISA
ISAs are essential tools for savers and investors, but they’re not perfect. Below are five key changes Hargreaves Lansdown would like to see:
1. Streamline the range of vehicles on offer
A balance needs to be struck between offering choice, and providing so many options that indecision paralyses potential savers and investors. There are two products that can be rolled into existing ISAs while maintaining this balance: Child Trust Funds into Junior ISAs and Help to Buy ISAs into the Lifetime ISA.
2. Allow people to subscribe to as many ISAs in a year as they like
The government would need to establish a reporting structure to enable this, but it’s perfectly possible. There are no restrictions on the number of different pensions you can contribute to each year (as long as you stay within the annual allowance) so why restrict the number of ISAs? This would iron out needless confusion – such as the fact you can’t currently put money a Help to Buy ISA and a cash ISA in the same year.
3. Allow ISAs to be passed on free of inheritance tax
Pensions can be passed on tax free after your death, but ISAs are potentially subject to inheritance tax. This could distort the way people view their retirement finances, and put them off saving into an ISA alongside their pension to create a valuable tax-free source of funds in retirement. Making both free of inheritance tax would level the playing field.
4. Cut the LISA withdrawal penalty to 20%
If you take cash out of the LISA before the age of 60 – for any reason other than to buy your first property – you face a penalty of 25%. This doesn’t just remove the government bonus, but takes a chunk of the money you have invested too (£6.25 of every £100). Cutting the penalty to 20% would mean you effectively just lose the bonus (and any growth on it) if you need the money for something else.
5. Completely separate the ISA allowances
The sharing of the LISA and ISA allowance is the single biggest cause of confusion among people considering a LISA, and creates administrative complexity for savers and providers. Separating the two allowances would solve this at a stroke.
This article was written by Sabuhi Gard for ‘advisor points of view‘ and can be found here.
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Sabuhi Gard is an investment writer for Incisive Works
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