Compares Cash-ISAs/Savings-Accounts with Stocks-and-Shares-ISAs
For tax-year from April 2017 we can put up to £20,000 per year
into tax-free savings whether Cash-ISA or Stock-and-Shares-ISA or a combination of the two.
With average annual gross earnings around £28,000; the £20,000 limit is more than enough for the ordinary saver.
|Tax year||Overall ISA Limit||Cash ISA Limit|
Cash-ISAs are risk-free. From 1st January 2016 the government guarantee reduced to £75,000 per provider.
Since 2010 savings have been eroded slightly by inflation.
£10,000 in a savings account returning 2.0% less than inflation loses £200.00 per year in purchasing value.
- For different dates on the chart:
Please make End-Year five or more years greater than Start-Year
Demand for Cash-ISAs fell sharply in 2016-2017. The number of new accounts dropped by 1.6m to 8.5m and
the total amount subscribed slumped by nearly £20bn to £39bn.
Stocks-and-Shares-ISAs increased to a record high with £22.3bn invested.
As well as low interest rates, the personal savings allowance introduced from April 2016 has contributed to the fall in Cash-ISA subscriptions.
With the personal savings allowance, savings interest in regular savings accounts is paid gross and basic-rate taxpayers can receive interest of up to £1,000 per year tax-free. £1,000 would be £40,000 at 2.5%.
Even so Cash-ISAs still account for 77% of ISA subscriptions.
Stocks and Shares ISAs - Index Tracker Funds
Stocks-and-Shares-ISAs are NOT risk-free.
FTSE-100 was 6930 at end-December 1999, and had fallen to 3287 in mid-March 2003. It was about 6730 on mid-June and mid-October 2007 and had fallen to 3512 early-March 2009. It was back around 7000 during the first 6 months of 2015 and again during the final months of 2016.
These huge variations make us cautious of equity-based savings, but ignoring equities removes the possibility of higher returns.
The theory is that low returns go with low risk, and higher returns with higher risks; and in the long-term equities will out-perform savings accounts.
Period 1990-1999 was exceptionally good for equities; 2000-2009 was bad for equities, we lost money in real-terms and we would have been better-off investing in Cash-ISAs; period 2010-2017 was better for equities. This is illustrated by the table showing outcomes for £5,000 invested at the start of the period. As with all examples start and end dates matter, 2000-2009 included two stock-market crashes.
- Start Year
ISAs based on Index-Tracker funds
ISAs based on index-tracker funds should have no initial charge (sometimes up to 5% for other funds) and annual charges which are lower than those for actively-managed funds.
There is research from US universities which says trackers overall, on-average, out-perform actively-managed funds.
Trackers account for only 10% of funds invested each year by retail investors.
An advantage trackers over individual shares is you do not need to check share prices regularly, you can leave monitoring to the fund.
Warren Buffett on advantages of Index-Trackers
Fund Platform Charges
It seems buying an index-tracker ISA direct from the provider is now regarded as an old-fashioned, more expensive,
method of purchase which is replaced by buying via a fund platform.
Using a fund platform adds an additional annual account charge though this may be offset by lower fund charges negotiated by the platform provider.
You can model the impact of annual charges using investment-charges-impact-calculator on Candid Money website.
Try 2% annual charge over 35 years. The longer the period the larger the impact.
For reference, FTSE All-share Total Return averaged 5.8% over the 17 years 2000-2016 and it averaged 9% over the 7 years 2010-2016.
Websites which compare platform charges:
thisismoney and go to the DIY INVESTING ISA CHARGES table near the top of the page.
monevator maintained by investment enthusiasts.
comparefundplatforms another calculator from Candid Money.
Searching for Suitable Index-Tracker Funds
Hargreaves Lansdown Search index tracker funds enquiry. Really excellent information, easy to use, designed for
a UK audience.
You do not need to be a customer to use the enquiry.
Covers index funds which can be purchased via the Hargreaves Lansdown platform - there are enough of them.
Morningstar => OEIC/Unit Trusts => Fund Performance pages.
Free, topical, reliable and comprehensive but takes a bit of getting used to. Includes all funds not just index-trackers.
For some it may offer too much information, too many choices, taking too much time.
Number of indices upon which index-tracker funds can be benchmarked has increased over the years.
Some indexes have become very specialised. Best to stick with indexes from major providers such as FTSE, MSCI, S&P, and look for funds with at least five years past performance figures.
Comparison of Geographically-based Index-Tracker Funds
The chart shows returns from £1,000 invested at start-year in various index-tracker funds.
As with all such comparisons start-year can change rankings.
- Start Year
|US||FTSE USA Index||Legal & General US Index Trust R Acc|
|World||FTSE Developed World ex U.K. Index||Vanguard FTSE Dev World ex UK Equity Index Acc|
|Japan||FTSE Japan Index||Legal & General Japan Index Trust R Acc|
|AsiaP||FTSE World Asia Pacific ex Japan Index||Legal & General Pacific Index Trust R Acc|
|UK||FTSE All-Share Index||Legal & General UK Index Trust R Acc|
|Europe||FTSE World Europe ex UK Index||Legal & General European Index Trust R Acc|
Other funds tracking the same index should have similar returns.
Defined Contribution Pensions
We now own our own pensions. George Osborne's 2014 budget removed many restrictions on pension-pot withdrawls
for people retiring after April 2015.
A year after the reform, most large fund providers were offering a direct-to-consumer flexible-access drawdown product. Whereas before the reform investors with less than £100,000 were not considered suitable for drawdown and had to buy an annuity.
”In spite of the fact that Pension Freedoms were introduced recklessly fast a few years ago, it is becoming increasingly clear that not only is it extremely popular with investors, it is also working better than many had dared to hope.
The impact has been transformative. It has shaped attention to pension savings and retirement in a positive way.”
Tom McPhail, head of retirement policy at Hargreaves Lansdown reported in Financial Times 28 June 2018.
Drawdown keeps the pension fund invested while providing an income. You can control the rate by which you consume the pension fund.
You can chose how the fund is invested: equities or bonds or a combination. This contrasts with annuities where the pension provider is limited to long-term bond yields.
Should you die before the fund is used up, the remaining pension pot can be passed on tax efficiently to beneficiaries.
Many pension scheme members must transfer their pension pot to a company that provides drawdown when they retire.
Annual drawdown administration charges are invariably charged on the whole pension pot.
Pension contributions are free of tax but not national-insurance. A 25% tax-free lump-sum
can be taken when the pension is cashed-in: whether drawdown or annuity.
Employer contributions in addition to the tax advantages make pensions an attractive savings option.
Money locked in a pension is maybe seen as too inflexible, especially early in a working lifetime.
Pay the tax and buy an ISA is then an alternative.
If you already receive maximum employer pension contribution and you are under 40, George Osborne's 2016 budget
announcing Lifetime ISA's is of interest.
From April 2017, people 18-to-40 can start an ISA account, investing up to £4,000/year and receiving 25% from government, max £1,000/year, at the end-of-each tax-year. 25% rebate continues up to age 50.
Property still beats a Pension, say retirement savers
On 06 February 2018 Financial Times reported the latest edition of ONS Wealth and Assets survey published the previous day.
Which method of saving for retirement makes the most of your money?
Chart shows 49% of people said property was the best way to save, up from 40% in 2012.
23% of adults expect to downsize as a way of getting income in retirement.
Our obsession with home ownership seems unlikely to fade soon.
Since the 2008 financial crash, house prices have risen in London and the South East but fallen in real terms in other parts of the country, though they are now recovering slowly.
Response from house price in real terms here
- House Price Region
Last updated 14 July 2018.