A study by the Yorkshire Building Society found that savers deposited £4.3bn into ISAs in the final week of the 2017/18 tax year, and the tax year just gone (2018/19) was set to see a similar final week deposit of up to £4bn. This was despite the number of ISA holders falling from 11.1m in 2016/17 to 10.8m in 2017/18.
ISAs, therefore, are continuing to be attractive.
They were launched two decades ago as a tax-free alternative to traditional savings accounts which failed to offer an interest rate that competed with the rate of inflation. At its advent, the total tax-free allowance was £7,000, but at least £4,000 had to be invested in funds, meaning the maximum you could save in a cash ISA was £3,000. Since then, the ISA portfolio has grown to include Help to Buy ISAs, Innovative ISAs and Lifetime ISAs. In addition to this, the tax-free saving allowance has increased, and today, savers are allowed to deposit up to £20,000 into their ISAs each tax year, tax-free.
That means no interest tax, no income tax and no capital gains tax. Cash ISAs also offer access to funds as easily as regular savings accounts and are an excellent choice when it comes to choosing a default savings account.
Take-up appears to be declining amongst younger generations, though, as the total number of adults saving into an ISA fell from 11.1m in 2016/17 to 10.8m last year. With so many opportunities available to young people these days, perhaps it shouldn’t be so surprising that saving into an ISA is losing its appeal?
How can ISAs evolve to maintain appeal?
Clues may lie within the rise of Open Banking, as digital money apps have empowered many people to manage their money more actively.
These apps play a huge role, although it could be suggested that financial education should begin at a very young age. Encouraging young people to invest for the long term requires knowledge of the difference between investment and saving.
Einstein famously said that: “The definition of genius is taking the complex and making it simple,” and it would be unwise to underestimate the importance of simplifying language. The financial sector is awash with acronyms and savings jargon, creating potentially confusing barriers to entry for savers.
Some financial advisers have called for a more holistic approach and to examine how other industries are driving long-term behaviour change. Think of how the music industry changed the way we purchase and listen to music with digital distribution and online streaming platforms such as Spotify.
Ross Duncton, head of Direct at BMO Global Asset Management, says that a ‘revolution is due for the savings and investment industry – with ISAs centre stage.’ After all, if savings options were to remain the same for the next twenty years, the steady decline of ISA uptake will only continue.
What Investment – Issue 434 May 2019