Pensions ‘fire sale’ blamed for Isa fund slump

Pensions ‘fire sale’ blamed for Isa fund slump

A pensions ‘fire sale’ could be behind the sharp fall in fund flows into Isas, industry figures have said, as data reveals a 40 per cent slump compared with last year.

Investment Association figures revealed net inflows for Isa funds dropped by more than 42 per cent to £1.5bn in the 2015/16 tax year.

Mark Polson, principal at research and consultancy firm the Lang Cat, said the figures could point to savers shunning Isas in favour of piling extra cash into their pensions in the run-up to the March Budget amid fears the Chancellor would scrap pension tax relief.

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For advised clients with constrained budgets, the choice would be to allocate money to a pension over an investment Isa to make the most of the higher-rate tax relief.

Non-advised Isa customers with concerns over pensions and general market uncertainty may have opted for a cash Isa instead, Mr Polson said.

“It’s going to be a bit of a bloodbath and a year to forget,” he stated, suggesting that the fall in fund sales was unlikely to be an ongoing trend given the popularity of Isas and the ‘noise’ around new products such as the Innovative Finance Isa and recently announced Lifetime Isa.

Abraham Okusanya, principal at research firm FinalytiQ, agreed that the fall in flows was a short-term reaction to pre-Budget pension rumours.

“The fear created by a ‘buy-while-stock-last’ attitude to pensions, meant advisers gave priority to funding pensions rather than Isas,” he said.

Ben Yearsley, investment director at the Wealth Club, also pointed out that, with the FTSE down more than 10 per cent over the last year, people were put off investing, despite falling markets offering buying opportunities.

Wealthier savers would also have been rushing to make use of pension allowances which have fallen drastically for higher earners, he said.

Adviser view:

Uncertainty over the upcoming June vote on Brexit may also have been a factor, according to Chelsea Financial Services managing director Darius McDermott.

He said: “There is the human psychological issue of people buying less when markets are difficult. The other big contributory factor is the uncertainty around Brexit. People are sitting on their hands in the run-up to the referendum.”

Ben Seager-Scott, head of investment strategy at Tilney Bestinvest, said that a lot of it came down to investor sentiment.

Comparing the strength of investment returns in 2013 and 2014, to the choppier investment landscape of 2015 and 2016, he said it was likely the recent tough period may have put some investors off investing.