The fourth CoreData Isa report examines the buying behaviour of UK retail investors for the 2016/17 Isa season. It also looks at the reforms brought into play in 2016 and further changes being made to rejuvenate the Isa landscape and bolster investor engagement.
The buying behaviour of retail investors is of paramount importance to industry players looking for growth. These include asset managers, banks, building societies, financial advisers and fund platforms.
The pervasive anaemic global growth following the global financial crisis at the end of the last decade continues to weigh heavily on the Isa market. Cash Isas, in particular, have suffered, offering nominal rates, which, in some cases are now lower than the rates investors can receive on their current account (Santander 123 for example).
It is a far cry from April 1999, when then chancellor Gordon Brown launched the cash Isa to critical acclaim. Thousands eagerly took out the tax-free accounts that offered inflation-busting interest rates. Back then, the best buy from Smile came with an interest rate of 6.5% – rising to 7.25% the following year. Isas were hugely popular because, with available rates of 7.25%, anyone with savings of just £7,000 would get £500 in interest and not have to pay a penny of tax.
Fast forward to 2016 and although every effort has been made to boost interest in the cash Isa market, it continues to face strong challenges. According to figures from Moneyfacts in April 2016, the average rate on an easy-access cash Isa had fallen from 1.51 % five years ago to a pitiful 1.04 %.
In a raft of broadly positive announcements for savers, former chancellor George Osborne announced that, from April 2016, the first £1,000 of any interest earned on standard savings and current accounts will be tax-free. This drops to £500 for higher rate taxpayers and nothing for those earning more than £150,000, who will continue to pay savings tax.
Putting that into context, with few cash Isa rates above 1 %, in the past, for every £100 interest earned, basic-rate taxpayers lost £20 in tax while those on the higher rate lost £40. Now, the new personal savings allowance (PSA) means every basic-rate taxpayer can earn £1,000 interest without paying tax on it (those on the higher rate can earn £500), equivalent to the interest on £100,000 in the top easy-access savings account. The result is many industry experts questioning the value of cash Isas given these new rules. However, there is still significant value to be had for top rate tax payers who are not eligible for these new benefits.
Global markets make the picture for stocks & shares Isas no easier to decipher. 2016 has been characterised by political shocks as populism continues to rise and the expectation of dispersion in returns from active managers makes picking the right fund all the more difficult. This is particularly relevant given that many developed markets continue to trade at record levels despite numerous threats hanging over them.
The Government is making every effort to keep the Isa market attractive to investors in this low growth environment. As part of the 2016 Budget, Osborne also announced plans to raise the Isa allowance limit from £15,240 to £20,000 in April 2017.
An additional boon was the introduction of the “Lifetime Isa”, which will give a 25 % boost to the money younger investors put aside. Savers can only open a Lisa if they are between the ages of 18 and 40. They can pay in up to £4,000 a year, but no more. At the end of the first year, the government will add a 25% bonus, ie. up to £1,000. From 2018/19, this bonus will be paid monthly. Since you can continue paying into a Lisa up until the age of 50, the potential eventual bonus is up to £32,000.
The money can be used to buy a property. This can be done without penalty only if you are a first-time buyer. In other words, you cannot have owned a property before. The property cannot cost more than £450,000. This is more generous than the Help to Buy Isa, which is limited to £250,000 outside London, but £450,000 in the capital.
Meanwhile, in the 12 months since its launch in December 2015, statistics show 27,222 property completions have been supported by the Help to Buy Isa since it was launched. Across 29 London boroughs, the London Help to Buy Scheme assisted 1,500 buyers in their purchase of a property between February and September 2016.
Help to Buy Isa rules see the Government add a £50 bonus to every £200 saved for a first home up to a maximum of £3,000.
CoreData Research surveyed 2,500 investors in the UK to gauge the current state of Isa ownership and buyer behaviour. This report will provide analysis around this segmented group of investors.