ISAs are great things, they really are. Invest up to £20,000 per year in a ISA, and do not pay a penny in income tax on the profits it makes for the rest of your life!
And we UK investors have taken them to our hearts, investing a total of £69.3bn in 2017-18. But that number bears closer examination, as it hides some unfortunate trends.
While the total amount invested in ISAs has been growing, the actual number of accounts has been steadily falling since a peak in 2010-11. It seems that wealthier investors are continuing to raise their ISA investments every year, while the less well off are turning away.
Cash ISA
Some of that will be due to the UK’s declining economic health in recent years, with folks having less spare cash. But I put at least part of the blame on the Cash ISA, and the disillusionment I think a lot of people have felt — I say ISAs are great, but only Stocks & Shares ISAs.
The problem with a Cash ISA is that you’ll struggle to get anything other than a pitiful annual interest rate, with the best easy access rates currently only reaching around 1.5%. With inflation running at 2%, you’re guaranteed to lose money in real terms — and what is the point of saving tax on that?
But unfortunately, a full 72% of ISAs opened in the 2017-18 year were Cash ISAs, alongside 26% Stocks & Shares ISAs (with the rest being mostly Lifetime ISAs). Looking at the split by value, 57% of the total cash invested went into Cash ISAs, with 41% going into Stocks & Shares. So while fewer people go for Stocks & Shares ISAs, those who do go for them invest significantly more money.
Millionaires
How many ISA millionaires are there in the UK? Hargreaves Lansdown had 113 ISA customers with £1m or more in their accounts at the end of February, while Interactive Investor had 88. Estimates suggest the UK has around 1,000 ISA millionaires (who, remember, aren’t paying any tax on their profits).
Where do the millionaires invest their money? It’s not in Cash ISAs for sure, it’s mostly in Stocks & Shares ISAs. Britain’s ISA millionaires hold very little in cash at around 7%, have around 12% in investment trusts, and a full 59% of their funds are invested in individual shares.
You too
Wealthier folk seem to better understand the benefits of investing in the stock market, and with the poor state of financial education in the UK that’s perhaps not surprising. But it really shouldn’t be that way. The one thing I hear most when I talk to people about investing in shares is that its horribly risky, and it’s a world controlled by insiders in the City who’ll have your shirt if you’re not careful.
But it really isn’t like that at all, and you don’t need to be a financial genius to open a Stocks & Shares ISA and invest modest sums of money using a relatively simple strategy — and join the ranks of those earning tax-free ISA profits.
