Cicero Policy Briefer

Issue 1, June 2006

Bright future for ISAs

By Jacob Coy

As recently as 18 months ago, ISA sales remained under pressure. Looking at recent sales figures, though, despite the turbulence recently seen in equity markets there is every reason to believe that the HMRC’s final figures for ISAs over the 2005-06 last tax year will reflect a major increase in retail investment through the Government's flagship savings and investment scheme.

The greatest movement has been back into stocks and shares, through both the mini and maxi components. According to the most recent statistics published by the IMA, April's net ISA sales of £622m represent an increase of more than 8% over March, and more than 6% higher than during the same period in 2005.

Cicero believes that this migration into ISAs is due to three major factors. Firstly, there has undoubtedly been increased investor confidence in the market, which outperformed expectations in the 2005-06 tax year. Specialist sectors and emerging markets funds have seen particularly strong growth.

In addition, there has been the recent Government focus on pensions planning and greater thrift for retirement savings. There is evidence that people are increasingly viewing ISAs as a useful savings vehicle for the longer term, given that they can achieve the same tax-preferred capital gains as with pensions (albeit without the immediate tax rebate). They will have access to the money and can still choose to make a lump-sum investment into a pension nearer to retirement (and perhaps even at a time when they can attract a higher level of tax relief). This is especially sensible for those who have reason to believe that they might be making sporadic contributions because of varied work patterns.

Finally, ISAs are increasingly flexible, which is proving very attractive to a wider pool of retail investors. New mediums for distribution such as online platforms have caught fire with the average investor. While sales from traditional advisors, the sales force and tied agents represented £529 billion in April, sales from fund supermarkets reached nearly £500 billion. For fees that are often 3-4% less, investors get a wider choice of investments, but no advice (which often proves costly).

The other way in which the flexibility of ISAs is apparent is in terms of their qualifying investments. The announcement in December 2005 that the Treasury would allow non-UCITS investments to be included in ISAs has given investors more freedom of choice regarding what to include in their tax-preferred wrapper. This was followed closely by the confirmation in the Chancellor's 2006 Budget that REITs will also qualify to be included in ISAs. This gives the average retail investor the opportunity for exposure to bricks and mortar as an asset class – without the complications and barriers to entry of property purchase.

Put together, these factors make the outlook for ISAs strong. It will be interesting to see how retail adjust their ISA-buying habits in reaction to the recent downturns and corrections in the equities markets. Will they invest in other vehicles within the tax wrapper, or will they simply shift their funds into other asset classes that are now given tax-preferred status? We shall have to wait and see, but regardless it would seem that ISAs have again become the favourite way for the UK public to save.

Jacob Coy can be contacted on +44 (0)20 7665 9535 or click here to email.

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