Isas still a popular saving tool

HM Revenue & Customs’ Isa statistics published in 2019 show than more than 10m adult Isas were subscribed to in 2017-18.  

Junior Isas were also popular, with nearly a million accounts subscribed to in the same period. HMRC’s next report, with statistics for 2018-19, is due to be published in April this year. 

Younger clients may prefer the idea of money they can access sooner if needed, in which case an Isa may be more appropriate.--Danny Wynn

It is unsurprising that Isas have attracted so many investors, as Danny Wynn, head of proposition, growth and strategy – FundsNetwork at Fidelity, explains.

“Isas hold several appeals for investors, namely the ability to invest up to £20,000 without paying income tax or capital gains tax on the returns they generate.”

They have other advantages too, he adds: “While Isas are generally not as tax efficient as pensions for the majority, they do offer the benefit of instant access.

“Some consideration will likely be given to the ‘trade-off’ between accessibility and tax efficiency, which reduces as a client gets older and the period of time in which money is ‘locked away’ diminishes.

“Younger clients may prefer the idea of money they can access sooner if needed, in which case an Isa may be more appropriate.”

Key points

• Isas are popular with savers
• There is a whole range of Isas to choose from
• There may be tweaks to Isas in the Budget

Alistair McQueen, head of savings and retirement at Aviva, takes a similar view: “When it comes to saving for our retirement, the pension is typically seen as the front-runner.

“And there is nearly 10 times more invested in private pensions than there is in Isas.

“But for those seeking a tax-efficient home for shorter-term investments, the Isa is still a great place to look.”

This is a particularly popular time for Isas, which feature prominently in the financial calendar in the first few months of the year.

If people do not use their Isa allowance before the end of the tax year, it cannot be rolled over, so there is a rush on at the moment, Mr McQueen points out.

“The first quarter of each year is referred to as ‘Isa season’ as millions of people seek to take advantage of Isa tax benefits before the end of the tax year.”

He does not expect any change this year, adding: “We can expect millions of people to follow this path in 2020.”

The Isa family

There are quite a few Isas to choose from nowadays, including the two that are perhaps the best-known versions (cash and stocks and shares) as well as the other main Isas offered, which include Innovative Finance Isas, Lifetime Isas and Junior Isas.

There have been some recent changes to the Isa family line-up, though.

For instance, Help-to-Buy Isas, targeted at first-time buyers, closed to new accounts on 30 November last year.

Those who had already opened a Help-to-Buy Isa (or opened one before 30 November 2019), are able to continue saving into their accounts until November 2029.

One of the main advantages of Isas is the flexibility they offer, as Mr Wynn of Fidelity points out: “Investors can also choose to spread the annual allowance across different types of Isa, meaning they can pick one that best suits their financial goals and circumstances – for example by selecting a Jisa to tax-efficiently save on behalf of children and grandchildren.”

We’ll have to wait and see whether the chancellor announces any further measures that might affect their future appeal in this year’s Budget.--Andrew Tully

There are some notable differences between Isas, however.

Cash and stocks and shares/investment Isas do what their names imply, allowing savers from age 16 to save their cash or from the age of 18 to invest in stocks and shares.

However, Lisas, introduced in 2017, have a specific age range, in that they are for 18 to 39-year-olds and are aimed at people looking to save to buy a property or to fund their retirement.

Up to £4,000 a year can be invested in this Isa, tax-free, either in cash, or in stocks and shares.

Also, savers receive a 25 per cent bonus on contributions, up to a maximum of £1,000 a year, from the government.

Access has its limitations though, as there is a charge of 25 per cent for withdrawals in the first 12 months, unless the account owner is buying a house, is aged 60 or is terminally ill.

IF Isas are another recent addition to the Isa family. Available to the over 18s, these enable investors to lend money to people and businesses through peer-to-peer lending platforms.

IF Isas tend to attract higher rates of interest, but the risk profile is higher too and they are not protected by the Financial Services Compensation Scheme.

As for Jisas, the current savings limit is £4,368 and they are available in cash and stocks and shares versions for children who do not already have a child trust fund.  

Only parents and guardians can open and manage the account, but the money legally belongs to the child, who can take control of the account when they reach 16 and then withdraw the money at 18.

This should be noted by parents who may open the account with a view to saving towards something sensible, such as the deposit on a property or university costs.

Children, however, may have very different ideas about what it should be spent on and as it is their money, disputes could arise. 

What next for Isas?

>Over the years Isas have evolved to become the first port of call for the vast majority of savers.--Andrew Tully

So, are Isas here to stay, or could they be replaced, as they replaced personal equity plans and tax-exempt special savings accounts? And will they continue to attract millions of savers?

It is thought unlikely that people will lose interest in Isas any time soon, or that the government is planning an overhaul, according to Mr Wynn.

“The attraction of Isas looks set to continue,” he says, “and although we have seen some changes introduced in recent years we’ll have to wait and see whether the chancellor announces any further measures that might affect their future appeal in this year’s Budget.

“However, at the moment, there’s limited indication that we’ll see any fundamental changes to their structure.”

They could do with a little tweaking, though, suggests Andrew Tully, technical director at Canada Life.

“Over the years Isas have evolved to become the first port of call for the vast majority of savers, and there is no reason to expect that popularity to diminish.

“However, there are a number of aspects of Isas that have become increasingly complex over the years and some of the rules could be simplified.

For example, the rule that prevents investors opening more than one cash Isa in a tax year and the under-used flexible Isa provision, which allows people to top up any withdrawals they have made in the same tax year without reducing their allowance.

“There are also a number of restrictions around the Lisa that would benefit from simplification.”

Fiona Nicolson is a freelance journalist