Are ISAs still a must-have as part of Advisers’ toolkits?
In November’s budget, you’ll remember the Chancellor reduced the annual allowance for a Cash ISA from £20,000 to £12,000 for those under the age of 65, while keeping the Stocks and Shares ISA allowance at £20,000. These changes coming into effect in April 2027.
ISAs are certainly popular vehicles - increasingly so. Over 15m accounts were opened in 2023-2024, a hike of 28% on 2022-23. The greatest growth was seen in Cash ISAs which grew by 2.1m. compared with 283,000 more Stocks and Shares ISAs and 209,000 Lifetime ISAs. Value-wise, this translated into £69.5bn in Cash ISAs - over twice as much as the £31bn in Stocks and Shares ISAs.1
More people are clearly more comfortable holding a Cash ISA. This is in spite of the average annual return on a Cash ISA over the past 10 years being just 1.2% - not keeping pace with inflation; and a fraction of the 9.64% for a Stocks and Shares ISA.2
Nudge, nudge
So, while many savers know this but continue to save into a Cash ISA, what will it take to encourage them to invest? Enter the Chancellor. With a budget message that if you want to benefit from your full £20,000 ISA allowance in the near future, you’ll need to invest a portion of it (up to £8,000) in a Stocks and Shares or Innovative Finance ISA. This will hopefully nudge some to invest in equity ISAs - or at least investigate the option for the first time.
The changes are also targeted at those aged 18-64, the group most likely to benefit from longer-term, tax-free investment. Not to mention compounding of any tax-free returns over time. Older Britons (aged 65 plus) will continue to have the option to spend their £20,000 in cash or Stocks and Shares as currently.
Additional moves to change behaviours
In an additional mini-message the Chancellor reduced the future flow of transfers from Stocks and Shares and Innovative Finance ISAs into Cash ISAs, banning them from April 2027. And created a new charge on interest paid on cash held in Stocks and Shares and Innovative Finance ISAs, to discourage investors holding cash indefinitely in these accounts.
While nudging specific audiences towards considering Stocks and Shares ISAs, the intrinsic purpose and value of each ISA type for savers, investors and advisers remains undiminished.
Cash ISAs continue to offer the security of guaranteed, risk-free savings (as well as tax-free growth) and act as a solid planning option for short-mid term savers, especially those with more immediate goals such as a deposit on a new home. For those entering retirement they also have a role to play as part of a structured strategy for risk management, ensuring steady income streams.
Stocks and Shares ISAs, however, consistently outperform Cash ISAs over time, no income tax is payable on their growth, and profits are exempt from Capital Gains Tax - of increasing value to clients’ estate planning.This could involve separating savings and investments into ‘buckets’ with different goals, timeframes and usages, as well as protection against volatility.
Conclusion
To what extent the Chancellor’s ISA initiatives nudge traditional ISA savers to invest a greater percentage of their allowance won’t be seen for several years. Nonetheless, any message that encourages investment for the right people at the right time is surely to be welcomed. As is the continuity of all three forms of ISA for retirement, estate and tax planning purposes.
Sources:
1 gov.uk