November 14, 2018
Future of ISAs – a tax shelter for high income earners?
In our last edition we looked at the narrowing of the ISA market, in particular the divergence...
The UK government recently released the Individual Savings Account (ISA) sales statistics for year ended April 2018 – with some concerning trends. Although £ volumes showed healthy growth, this is a narrowing (and highly segmented) market in terms of customers.
For those unfamiliar with the UK market, an ISA is a tax-advantaged savings vehicle in which individuals can invest up to an annual cap (now £20,000) from after-tax monies. Returns accumulate within the ISA tax-free, and the balance can be withdrawn at any time.
For most taxpayers, an ISA should be the most tax-efficient destination for non-pensions savings capacity up to the annual limit.
The two main sub-categories are Cash and Stocks & Shares, which refer to the different investment profile (cash deposits vs growth assets), but are in reality these are quite separate markets.
• Cash ISAs are essentially bank account substitutes and primarily offered by deposit taking institutions such as banks. Mass market and mostly sold direct.
• Stocks & Shares ISAs are more serious wealth accumulation products, provided by a broad range of wealth industry participants, many via platform wrappers offering a wide range of growth asset exposures (not just direct equities). More affluent investors and distributed both through advised and direct channels.
There are Junior ISAs for children with lower annual limits, and some specialised ISAs including the Lifetime ISA (LISA), which has a split personality, functioning as either a real estate deposit or a retirement income supplement. None of these more specialist ISAs are (yet) very commercially significant.
The ISA annual investment allowance has been increased regularly in the past 10 years, from £7,200 in 2009 to £20,000 for the 2018 year. Yet as chart 1 shows, this looks like a market which is losing its appeal:
Sales (accounts receiving contributions, whether new or existing) which were running consistently at ~15m pa as recently as 2013, have fallen by one third to under 11m in 2018.
Given that this figure refers to total product sales, and that individuals can contribute to more than one ISA (over 30% do so according to NMG analysis), the number of individuals contributing to ISAs is therefore likely to be under 10m.
Against a UK working age population (the prime audience) of 41-42m, ISAs is now a product category being taken advantage of by less than a quarter of its market, compared to closer to 30% 10 years ago. This is, at the least, a product with a narrowing market.
Closer examination shows that all the pain is in Cash ISAs, where sales have fallen by over 4m since 2009 from 12m pa to under 8m. In contrast Stocks & Shares sales have been roughly stable, oscillating mostly between 2.5-3m pa.
So what’s going on? Further hints are provided by chart 2 which shows £ volumes growing despite the shrinkage in account sales.
The different nature of the ISA markets can be seen here as well.
If we use 2013 as the base – the year when the data trend changed – the 5-year CAGR for Cash ISA £ sales is slightly negative. For Stocks & Shares the CAGR is ~12% pa – very healthy, especially given limited growth in accounts receiving contributions.
So is this a case of investors responding to different relative returns? To an extent:
• Cash ISAs did well when interest rates were higher, but with rates near zero and lock-ins expiring, there has been little interest income to protect from tax in recent years. The introduction of the Personal Savings Allowance (exempts up to £1,000 of interest income) has also reduced their appeal.
• Growth asset returns have been strong, encouraging increased usage from holders of Stocks & Shares ISAs.
• However there has been no wholesale switch of sales from Cash to Stocks & Shares ISAs. Cash ISA customers have stopped contributing rather than switching in large numbers to Stocks & Shares ISAs.
• Contributing ISA customers, especially Stocks & Shares customers, are making more use of ISAs as allowances increase (and the tax benefits which come with them). We are therefore looking at a narrowing, but deepening market.
So do we simply need to wait for the UK to follow the US in raising rates for Cash ISA volumes to recover and the ISA market to broaden again? Perhaps. But much else beyond interest rates has changed since 2013, and there are some strong headwinds.
In our next Citylogue edition, we’ll look at the future prospects of this important product category and what investor behaviour is saying about its place in the wealth landscape.
For more information, contact:
Andrew Baker, Partner (London; firstname.lastname@example.org)
Charles Lake, Senior Consultant (London; email@example.com)