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As ISAs approach their 19th birthday, their popularity for savvy investors is greater than ever. Here are a few reasons why:
Reduced pension opportunities When Individual Savings Accounts (ISAs) were announced in 1998, pensions were still the main savings vehicle for many — especially the professional middle-classes. Today, defined-benefit pensions have been eviscerated. There are few active schemes left outside the public sector and steep reductions in the annual and lifetime allowances mean that better-off savers need to be careful about amassing large defined-contribution funds. As a result, the focus on ISAs has been magnified and investors have flocked to take up the increased annual allowance (£20,000 for 2017/18 & 2018/19).
Inflation eating into savings Inflation is currently running at 3% (CPI) in the UK. The best instant-access savings account to be found at the time of writing was 1.35% and the best one-year fixed-rate bond about 1.95%. The prize rate on Premium Bonds is 1.4%. So by this time next year, any money you put in a savings account is guaranteed to have less purchasing power than it does now. As a result, investors are increasingly turning to stocks and shares ISAs.
A tax-free legacy The tax benefits of ISAs (investments are free from capital gains and income tax) used to die when you did. Not any more: you can pass on your ISA savings to your spouse or civil partner free of IHT.
Saving opportunities extended to Children ISAs used to be for over 18s only. Now you can set up a junior ISA for a child (the allowance is £4,128 for 2017-18, rising to £4,260 for 2018/19).
No cap on maximum ISA value The number of ISA millionaires is estimated to be up to 1,000 people, though the exact figure has not been revealed. Britain's first ISA millionaire, Lord Lee, took 16 years to make £1m. The peer began investing tax-free when ISAs’ predecessors, PEPs, were introduced in 1987. The total amount he had invested was just £126,000, with the remaining £874,000 derived from investment growth. He described his approach to savings as “patient, brick-by-brick investing and, very importantly, dividend reinvestment”.
For an investor starting now, investing £20,000 a year and assuming growth of 7% each year (after charges), it will take 22 years to become an ISA millionaire.
So the opportunities offered by ISAs are better and more important than ever. Whether you are starting from scratch or topping up existing savings, ISAs remain the simplest and most competitive vehicle – a no brainer. Their simplicity (no tax reporting required) and Governmental support - indicated by recent increases in allowances to date, means that reaching healthy savings targets has become more achievable than ever. There is no minimum contribution limit, and easy access means that funds are available in case of emergency.
For further information on how Church House can help you invest your or your family’s ISAs, please contact the Private Client team on 020 7534 9871.