I-SAy sir, what mighty tax efficient investments you have.
Individual Savings Accounts, better known as ISAs, were introduced to the UK in 1999 to supplement, and ultimately replace, Personal Equity Plans (PEPs).
They love an acronym the ol’ HMRC don't they.
Based on current rules, ISAs are the only completely tax-free investment vehicle that we can get our grubby little mitts on in the UK.
ISAs can grow completely free of tax, and any natural income you take, as well as any additional lump-sum withdrawals, are also completely free of tax.
You can invest up to £20,000 per person, per tax year and if this grows over time - by whatever amount, 100% or more - then you don’t pay tax on any of it. Not many things qualify as a no-brainer in the UK Financial Services - which has the world's most complicated rules and regulations by a long stretch - but using your ISA allowance where appropriate, comes close.
There are two* main types of ISAs: cash ISAs and stocks and shares ISAs. *There are other more complicated ones (see, told you!) but we can cover them another time.
So, here’s my pitch… cash ISAs are about as useful as an ashtray on a motorbike. With all the aforementioned considerations of ISAs being the only tax-free investment available, it literally makes no sense whatsoever to hold cash ISAs when cash interest rates are half of nothing… at best.
We look for clients, in most scenarios, to start saving their cash in alternative cash-based deposits that still do a sterling job (pun intended). Then, we transfer your cash ISAs and any future ISA savings to stocks and shares.
Why? Because stocks and shares - better known as equities or less commonly understood to be the great companies of the world - will make you a tidy return over the longer term, as they always have in the past. There's little point in investing in something that provides tax-free returns when it doesn’t actually give you any returns at all.
Crank that return (and short-term volatility) up. Waaaaay up.
Since the inception of ISAs (when they were still called PEPs) in 1999, the total amount you could have invested over each of the tax years, is £206,560 per person. If you had left it in cash, it would have only increased in value by a few percent. Whereas there are numerous studies conducted that showed people’s ISA pots growing to over £1M by 2012. This was achieved through smart, long-term investing.
Which scenario would you prefer?
Once again, I caveat this by suggesting that ISAs, nascent as they are, will no doubt be restructured/scrapped by the next government looking to be clever by undoing all the previous government’s work and making our financial services profession, once again, more complicated than it needs to be.
Also, I hasten to add, this isn’t advice. Advice is regulated and this is just a blog written by someone who doesn’t know your finances very well. Probably.
Alfie Mullan, November 2018