How to help clients make sense of Isas

Now, if one goes onto any online money forum, whether it's comments on FTMoney, questions on MoneySavingExpert or MoneyBox discussions, one can find plenty of people asking whether they should go for one Isa over another.

Consumers, especially those who do not yet have a financial adviser, are confused by what's on offer - is it any wonder they tend to leave Isa investing until the very last minute in the tax year?

This is especially prevalent among young people in their 20s and 30s who know they want to start investing in an Isa but have no idea which one might be best for them and their circumstances. 

We now have: 

• Innovative Finance Isas (IFISA).
• Help to Buy Isa.
• Lifetime Isa.
• Cash Isa.
• Junior Isa.
• Stocks and Shares Isa.

All with their own unique set of rules, minimum investment, penalties, investment terms, risks and raisons d'etre.

As Richard Hoskins, co-founder of Kin Capital, comments: "The Isa has fallen victim to chancellors in search of snappy new announcements."

He warns there could be more to come: 

• Pisa - "The patient Isa that Neil Woodford's remaining supporters are still waiting for".
• Wisa: "The extra tax break for university academics to encourage them back to work".
• Disa - "What the inheritance Isa should have been called". (Although thankfully, the rules around inheriting an Isa were made much simpler in April 2018 to allow the deceased's Isa to remain sheltered from tax and passed on in its entirety).
• Kisa - "Extra allowance for royalists and members of the armed forces".

Of course, Mr Hoskins jests - but with recent moves by organisations such as the Centre for Policy Studies to promote Pension Isas instead of regular workplace pension saving, one has to wonder whether there's more than a grain of truth in what he says.

How did it get so complicated?

"In my experience", says James Nield, investment manager at Thesis Asset Management, "despite having been available since 1999, Isas remain poorly understood by many.

"A surprising number of clients think of Isas purely in terms of cash Isas. The previous distinctions between cash Isas and stocks and shares Isas and the different subscription limits which used to apply remains a source of confusion."

The crux of the problem is that many Isas currently benefit the intermediaries and providers much more than they benefit the savers. The inefficiency must be corrected or savers will vote with their wallets and go elsewhere. Luke Davis

Mr Nield adds: "Help to buy Isas, lifetime Isas, junior Isas, flexible Isas, IFISAs, additional permitted subscriptions: all these have come along and expanded the scope of the marketplace - and with that increased choice can come bewilderment.

"Add to that the number of competing providers of services within these wrappers and it is no wonder that consumers find it difficult."

Tim Morris, IFA with Russell & Co, agrees. "There are too many Isas", he says, and the rule changes have not been communicated as clearly as they could be, he believes.

Mr Morris says: "As with pensions, they have become increasingly complex. Based on my experience of dealing with knowledgeable investors, I severely doubt the majority of savers are not aware they can now repay the money they withdraw from their Isa in that same tax year."

Moreover, the types of Isas add to the complication, not least around the lack of understanding of the risks involved.

"I don't have any clients enquire about the IFISA; I'm all for encouraging investment in small businesses but investors do not realise they will not be covered by the Financial Services Compensation Scheme (FSCS) if they invest in these," Mr Morris adds.

Generous allowances

Since launch, the annual subscription to Isas has risen significantly, from £7,000 for stocks and shares, and £3,000 for cash in 1999, to £20,000 regardless of Isa type from 2017 to 2018 tax year onwards.

While boosting the Isa allowance to a generous £20,000 is a boon for some investors, for many of those starting out on the savings journey, it simply is not tenable for them to maximise their Isa allowance each year.

It is hard to imagine a millennial earning the average £26,500 wage in the UK (according to Office for National Statistics data) being able to set aside £20,000 of that in a tax year, but for those who are earning enough to put aside, the rule of thumb has been to boost workplace pension first, then maximise Isa allowances.

And Isas have proved exceptionally popular, no doubt driven by the ever-escalating annual allowances. Figures from HM Revenue & Customs reveals that in 2017, £62bn was put into adult Isas and £858m was put into junior Isas.

However, too much of this seems to be stuck in poor-performing cash.

Paul Latham, managing director of Octopus Investments, says: "It seems like Britons have an uneasy relationship with their Isas.

"Understanding the full suite of Isa options out there has arguably never been more important. Beyond cash and stocks and shares, alternative options like the IFISA could prove helpful for those clients who want the potential of attractive returns outside of equities."

Mr Latham believes: "People should view an Isa for what it is – a tax wrapper under which they can hold a range of investments, whether that be cash and stock and shares, as well as VCT and P2P products."

Quality and quantity

According to Luke Davis, chief executive and founder of private investment house IW Capital, it's not just the choice - it's the quality of that choice.

He says: "The main issue affecting the Isa market at the moment is one of quality, alongside quantity. With a number of products offering 0.5 per cent to 1.5 per cent in interest rates – the money might as well be sat in your savings account – the scale of what’s on offer has reduced market competitiveness significantly.

"The crux of the problem is that many Isas currently benefit the intermediaries and providers much more than they benefit the savers. The inefficiency must be corrected or savers will vote with their wallets and go elsewhere."

For Mr Davis, the relative newcomer, IFISAs, which are peer-to-peer backed innovative finance Isas, might actually be a solution to the lack of quality, despite the higher risk and higher degree of complexity.

He opines: "While there is a deal of risk attached to [the IFISA], as there are with all forms of investment, this does look like the direction that the market will take."

Add to that the number of competing providers of services within these wrappers and it is no wonder that consumers find it difficult. James Nield

Yet for Rachael Griffin, tax and financial planning specialist for Old Mutual Wealth, it is especially important for those beginning their savings journey to consider the implications of their choices.

She comments: "For example, the lifetime Isa (Lisa) is supposed to be a one-stop-shop savings vehicle that combines saving for the first home and for a pension.

"However, it is muddled and has left young people uncertain about where to invest. For example, while pensions do not count towards means-tested benefits, a Lisa does. 

"So if a young person loses their job, where they saved their money could determine if they are eligible for benefits."

Making the investment case

Regardless of the type of Isa - which is fast becoming an advised business, given the complex nature of the savings beast - it is important to make the most of Isa and, indeed, pension or self-invested personal pension (Sipp) contributions early.

The two tables, below, from Old Mutual Wealth show the importance of maximising one's Isa and pension allowance and starting the investment journey at the beginning of the tax year - on 6 April, rather than doing it all at the end of the tax year on 5 April.

Table 1: Investing the Isa allowance early

Table 2: Investing the pension allowance early

NB: The examples are based on the performance of the IA Mixed Investment 40-85% Shares sector, and show the amount of additional growth a client could have benefited from if they invested on 6 April (the beginning of the tax year), versus investment on 5 April (the end of the same tax year), over a five year period.

But it's more than about just a choice of investment products, or even about how quickly one can benefit from being within one.

As Tracyann Kneen, product technical manager at Nucleus, explains, it's about viewing these savings and investment options against the client's financial goals - "whether that's saving for a mortgage deposit or funding a comfortable retirement", she says.

"The flip side is [the expansion of the Isa universe] has also made it difficult to know which Isa is appropriate for a client's circumstances, especially since each type of Isa has its own rules."

This is why Daniel Rodwell, managing director of Growth Invest, says it is important to evaluate which of the "specific Isas available are designed to assist with real problems experienced by society today".

He elaborates: "For younger investors, it is possible to make use of a help-to-buy Isa, which helps first-time buyers who may be struggling to get onto the property ladder."

The capped 25 per cent bonus goes "some way" to assisting a generation which he sees as "struggling with unprecedented house prices as a multiple of income".

Likewise, he points to the use of a lifetime Isa (Lisa) to begin long-term savings for retirement, while the issues over liquidity have been addressed through the introduction of the flexible Isa, which allows people to draw down funds for emergencies, then reinvest without affecting the annual limit.

Keeping it simple

Ms Kneen believes it will be "key for advisers" to communicate how an Isa can help with achieving young investors' financial goals.

Yet the choice and complexity of Isas as a product is now the main question, rather than simply getting people through the doors to invest by midnight on 5 April.

Therefore, Ms Griffin advocates pushing for a "simplification of Isas to help savers get to grips with one set of rules and features".

She points to the recent proposal from the eight-strong Association of Accounting Technicians' Isa Working Group, which includes MPs Kirsty Blackman, Sir Graham Brady and Chris Leslie.

As with pensions, [Isas] have become increasingly complex. Tim Morris

The proposal was for an Everything Isa, where people could fold all their existing Isa savings into one easily accessible online portal. Ms Griffin adds: "Such an Isa, which is opened as soon as a baby's birth is registered, could help set up a new generation of savers with the tools they need."

In the meantime, for those advisers getting a casual investor with only a small amount to invest coming to their doors at the end of the tax year, it might not be worth the adviser's time or the investor's money to provide full-scale investment advice, research, due diligence and suitability reports.

However, it would be a great starting point to provide some information by pointing people to websites such as the moneyadviceservice.org or gov.uk websites. 

As Mr Nield says: "These are impartial and designed to be accessible to the widest possible cross-section of the population - young people included."

simoney.kyriakou@ft.com