As I look into 2019, I see a number of facts and statistics that worry me. Many people in the UK have nothing but the State Pension to look forward to when they retire — and at only around £8,500 per year, that could mean a struggle.
The minimum age at which we become eligible is rising too. For me it’s 66, but it’s already been raised to 68 for some younger folk — and I’ve little doubt that there are people alive today who’ll have to wait until 70 before they get anything.
On the upside, more and more people every year are realising that they have to make some extra provisions for their retirement, and many are turning to two potentially very good investment vehicles — the Self-Invested Personal Pension (SIPP) and Individual Savings Account (ISA).
Worst choice
But of those going for ISAs, most are choosing what I see as the worst kind. I know that what was once a simple offering has burgeoned and we now have the Adult ISA, Junior ISA, Help to Buy ISA, and Lifetime ISA. But the biggest con right now, in my view, is the cash variety.
According to government figures, around 10.8m adults invested in ISAs in the 2017-18 year. Unfortunately, since the number of ISAs peaked in 2010-11, the number of people contributing annually has been falling — and last year’s total was down from 11.1m subscribers in 2016-17.
But, at the same time as numbers have been falling, total amounts invested are still following a general upward trend. Around £69bn was invested in 2017-18, up £7.8bn on the previous year.
Wasted opportunity
But here’s what I see as the most disappointing statistic of all: a full 72% of the 10.8m ISA investors in 2017-18 plumped for a cash ISA. That’s down from 77% in 2016-17, but it still seems like such a waste to me. Why?
The big problem is that cash ISA interest rates are so low, they’re guaranteed to actually lose you money in real terms. So you’re not paying tax on… your loss! What kind of investment is that?
The best long-term rates I can find when I search today top out at around 1.5% per year, and the UK’s annual inflation rate stood at 2.4% in October. And that is, unarguably, losing money.
There are introductory rates on offer, but after the teaser period they tend to drop to even less than the typical 1.5% — a friend of mine even had his ISA interest fall to a tenth of 1%!
Anything better?
Though far fewer people invest in stocks and shares ISAs, they do invest proportionately more. And over the long term, it pays off.
Since May 2012, the FTSE 100 total returns index has risen by 63%. And if that sounds like something fancy, it’s just a measure of the total performance of the FTSE 100 (which is just the 100 biggest companies listed in London) including all dividends.
A cash ISA paying 1.5% per year would, after compounding, get you just a 10% gain. So if you go for a stocks and shares ISA and simply put the cash into a FTSE 100 tracker fund, you’re likely to easily beat a cash ISA hands down.
And if you carefully select individual high-yield shares, I reckon you can comfortably get 6% per year from dividends alone.
