The amount invested in Isas is set to rise by two-thirds this year, according to CoreData Research, as people gear up to take advantage of a higher tax-free allowance.
Isa sales are on course for a 66.7 per cent increase from £57.2bn in 2013/14 to £95.4bn in 2014/15, the financial services research and consultancy firm has claimed in a recently released report on the buying behaviour and distribution of Isas.
The total value of cash Isas is set to increase by 87.1 per cent from last season to £72.6bn for the 2014/15 season – assuming that customer numbers remain consistent with HMRC account holding figures, the report said.
In addition, the amount invested into stocks and shares is also set to rise, taking assets to £22.8bn – up by almost a quarter (23.4 per cent) from the previous year.
CoreData also predicts a rise in the average investment in cash and the average stocks and shares Isas by 74 per cent and 21.6 per cent to £6,413 and £7,496 respectively.
New Isa rules came into play in July last year allowing consumers to save up to £15,000 a financial year tax free – a 30 per cent increase from the previous £11,520 limit.
This entire allowance can be placed into a cash or stocks and shares Isa or divided between both.
Despite low interest rates offered for cash Isas they still prove to be popular, according to Craig Phillips, head of international at CoreData Research, adding: “The leaning towards cash over equities is a mixture of education, awareness and perception of risk.
“In short, the industry really has to ask itself if it can do more to promote the benefits of stocks and shares Isas, and put an end to the indisputable ‘cash is king’ mentality for the majority of the British public.”
Michael Basi, managing director of Basi & Basi Financial Planning, based in Essex, said that the ongoing volatility in the market means that investors are becoming more cautious, particularly when they do not have advice.
“However, some people who opt for cash Isas might be a bit disappointed with their returns even with a reduction in inflation and a fall in energy prices because of low interest rates.”
He added: “Not many people go to an adviser over a cash Isa and you can’t force them to pay for an adviser to tell them that an investment Isa might be better suited to them.”
Though cash Isas will see an increase in investment, the majority of the people who will invest their full allowance will do so in a stocks and shares Isa, according to the report.
CoreData Research surveyed 3,500 investors in the UK to gauge the current state of Isa investments and their intentions for the 2014/2015 Isa allowance, in terms of both average size of saving and investment and popularity of providers.
It found that 22.6 per cent of the individuals surveyed will make use of the maximum allowance this financial year, and of those 13.1 per cent will invest fully in stocks and shares. Only 6 per cent will invest the full sum into a cash Isa and the remaining 3.5 per cent will use a mixture of both products – which highlights the fact that those looking to take advantage of the hiked Isa limits are probably wealthier individuals who tend to prefer stocks and shares Isas, the study said.
What is more, a higher portion of advised investors will buy a stocks and shares Isa than non-advised individuals for the 2014/2015 Isa season.
Also, more male investors will put money into a stocks and shares Isa compared with female investors.
In total, just over a quarter of investors have at least one subscription to a stocks and shares Isa. When broken down by segments, the figure is three percentage points higher in males (28 per cent) than females according to the dossier.
Only five per cent of those aged between 18 and 35 years old will attempt to use their stocks and shares Isa allowance, subscribers to Isas in the 36 to 50 age range will remain at 12 per cent this year. The number increases to 21 per cent for those above 65 – a sign that those in retirement are still attracted to saving tax-free, according to the document.
Describing the finding as unsurprising, Andy Brooks chartered financial adviser and director of Peterborough-based Brooks Wealth Management, said: “The money accumulated by people who are in the first stage of their lives could potentially be called upon once they start having children and start thinking about a mortgage for a house for example. A cash Isa suits them because it is more liquid.
“However, as people reach the latter stages of their lives, there is a natural migration towards investment Isas because the returns could possibly fund long-term healthcare among other things in the future.”
Cash Isas appear to be more popular among females than males with 55 per cent of females opting to invest in the Isa as opposed to 44 per cent in males.
Cleona Lira, an IFA at 2Plan Wealth Management, based in London, said: “It could be because more men are taking actions over their investments than women.
“I think some females might have difficulty understanding the investment process, in this case the difference between cash and investment Isas. However, the lack of education in investment option is not exclusive to women.”
What is more, the report found that over a third of investors aged between 18 and 35 have cash Isa. This increases among the older generations with 71 per cent of the sample aged more than 65 years old holding a cash Isa.
Meanwhile, 52 per cent of non-advised investors have subscribed to cash Isa, five percentage points more compared with advised investors – indicating that advisers’ influence is not as great on cash Isas than stocks and shares Isas, the report said.
However, almost three-quarters of investors said they do not use their full allowance each year because of a lack of surplus funds, it added.
A majority of those who subscribed to a cash Isa had only done so once, which suggests that a large portion of respondents do not see making annual savings in the Isa as a possible or appropriate strategy, according to the study.
The group with the highest portion of investors that will invest in a cash Isa are mass affluent investors, followed by mass market, and then emerging high net-worth investors, the report said.
The uptake of the two Isa options differs from region to region in the UK.
The East Midlands has the highest uptake while the South West has the highest average investment at just over £9,000, according to the study.
In addition, London and the South East lie in the middle of both the percentage uptake and the average investment, whereas the lowest uptake of stocks and shares Isa is in the West Midlands which has an average stocks and shares Isa investment of £5,556.
For cash Isas, noticeably low uptake figures are seen in the North East of England, conversely, the region with the highest uptake is Northern Ireland at 38 per cent.
Myron Jobson is a features writer of Financial Adviser
Key points
Research suggests that the amount invested into Isas will increase by two-thirds this financial year.
Despite the low interest rates offered in cash Isas, they still prove to be popular
A majority of those who subscribed to a cash Isa had only done so once
