Happy 15th anniversary, ISA

Balloons sent in the air, the image in refer to ISA

Savings

Alistair Hardie

8th April 2014 at 1:37pm

Back in 1999, no-one knew how popular ISAs would become.  But with £443 billion* now held in ISAs, they’ve established themselves as a core option for saving and investing in a tax efficient way.

From 1 July 2014, we have a new £15,000 limit to look forward to, which can be used for stocks and shares, or cash.  Meantime, from 6 April 2014, the Stocks and Shares ISA limit is £11,880, with a Cash ISA limit of £5,940.

Getting engaged

ISAs have proved to be a match for many savers and a saving vehicle we’ve really engaged with. I mentioned in a previous blog on ISA choices that 24 million people have  saved or invested with an ISA. The enduring appeal of ISAs is that you don’t pay income tax or capital gains tax. With these great tax advantages, it’s not a surprise that ISAs have such a broad appeal. And they’re particularly popular with the over 65s, with figures showing this age  group has both the highest number of ISAs and also the highest average ISA value.

With these great tax advantages, it’s not a surprise that ISAs have such a broad appeal. And they’re particularly popular with the over 65s, with figures showing this age  group has both the highest number of ISAs and also the highest average ISA value.*

As with every partnership, you need to take the rough with the smooth. And with Stocks and Shares ISAs, that means being in it for the medium to long term and weathering the ups and downs of the stock market. As this blog on saving for the long term showed, taking just the first year’s performance on its own can mean things can get taken out of context.

Taking stock of performance

If you’d been an early adopter of ISAs since launch in 1999, how might your ISA be looking now?  Here’s an example.

If you had first invested in your ISA 15 years ago and, on the first day of the tax year, paid in an amount equal to the Cash ISA limit each year since, you could be enjoying a very rewarding 15th anniversary!

If this had been a Stocks and Shares ISA in a fund which tracked the FTSE® All-Share Index, your investment could now be worth £99,372** before charges. Had you chosen a Cash ISA instead, your savings might only now be worth £ 67,744.***

Please note the above example is for illustrative purposes only and assumes the Cash ISA interest rate mirrored the Bank of England base rate over the savings period (past performance is not a guide to future performance).

Marrying up your choices

That’s over £30,000 more in the Stocks and Shares ISA compared to the Cash ISA over the same period, but of course, people have different goals. It’s not a case of ‘one size fits all’, when it comes to choosing between a Cash ISA and a Stocks and Shares ISA. It’s not a case of ‘one size fits all’, when it comes to choosing between a Cash ISA and a Stocks and Shares ISA. If you’re up for a long term relationship then Stocks and Shares may fit the bill better than cash, with the potential opportunity for growth which could beat inflation.

Through thick and thin

And that’s just one time period – investments won’t always outperform money left in cash, particularly over shorter time periods, and the amount you get back will depend on the investments you choose.  But this does illustrate why investments can be the better choice over the long term.

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The information in this blog and any comments are not financial advice. A Stocks and Shares ISA is an investment. Its value can go up or down and may be worth less than you paid in. Laws and tax rules can change in the future.

* www.hmrc.gov.uk/statistics/isas/statistics.pdf

**For illustrative purposes only. Source: Datastream, from 5 April 1999 to 6 March 2014, all dividends reinvested.

*** For illustrative purposes we have assumed that the Cash ISA interest rate mirrored the Bank of England base rate over the savings period. Source: Datastream, from 5 April 1999 to 6 March 2014.

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