Technical Manager and Trainer, The Investing and Saving Alliance (TISA)
It’s 2023, and millions of people have little or no savings. Many lack the confidence to manage their financial affairs as research shows that nearly 20% of consumers are down to less than £1,000 in cash assets.
Despite the lack of confidence in managing financial affairs, there is one success story that has encouraged millions to save over the last twenty years — the Individual Savings Account (ISA). Launched by the Government in April 1999, in the 2020/21 tax year, approximately 12.2 million people subscribed to one, and around £687 billion was held across all types of ISAs.
Types of ISAs
The scheme has changed over the years, and we now have three main ISA types: cash; stocks and shares (S&S); and innovative finance (IF). Two also encourage people to save for their first home and later life: the Help to Buy ISA; and the Lifetime ISA. The current annual limit for all ISAs is £20,000.
The majority of Cash ISAs are deposit accounts where initial deposits are protected. This is ideal for short-term savings, as interest is tax-free and doesn’t count towards the personal savings allowance. However, especially in the current economic climate, long-term returns can be eroded by inflation.
The majority of Cash ISAs are deposit accounts where initial deposits are protected.
Risks and protection
S&S ISAs permit numerous investment options, usually provide a superior return over the long term and can be used for multiple purposes. Investors are protected from capital gains and UK income tax. Our research has found that consumers often significantly overestimate potential risk associated with loss in a S&S ISA (at 25%), whereas the real risk — as that figure in diversified funds over a ten-year period — is less than 3%.
The IF ISA is a relatively new ISA type and provides the option for individuals to invest in peer-to-peer loans. The primary advantage of the IF ISA is that the interest rates available are typically higher than those from Cash ISAs. However, they do not have the same levels of protection against loss.