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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 yearOverall ISA LimitCash ISA Limit
2008-09£7,200£3,600
2009-10£7,200£3,600
2010-11£10,200£5,100
2011-12£10,680£5,340
2012-13£11,280£5,640
2013-14£11,520£5,760
2014-15£15,000£15,000
2015-16£15,240£15,240
2016-17£15,240£15,240
2017-18£20,000£20,000
2018-19£20,000£20,000

Cash ISAs

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.

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.

Cash-ISAs less popular

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.

Risk Matrix

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.

PeriodLengthInflationCash-ISAShares-ISA
1990-199910 years£6,810£9,800£18,768
2000-200910 years£6,069£7,727£5,455
2010-20178 years£5,964£5,813£9,638

 

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.

expand/collapse  Warren Buffett on advantages of Index-Trackers

expand/collapse  Fund Platform Charges

expand/collapse  Searching for Suitable Index-Tracker Funds

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.

KeyAbbrIndexFund

USFTSE USA IndexLegal & General US Index Trust R Acc

WorldFTSE Developed World ex U.K. IndexVanguard FTSE Dev World ex UK Equity Index Acc

JapanFTSE Japan IndexLegal & General Japan Index Trust R Acc

AsiaPFTSE World Asia Pacific ex Japan IndexLegal & General Pacific Index Trust R Acc

UKFTSE All-Share IndexLegal & General UK Index Trust R Acc

EuropeFTSE World Europe ex UK IndexLegal & 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.

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.

Many pension scheme members must transfer their pension pot to a company that provides drawdown when they retire.
Annual drawdown administration charges are charged on the whole pension pot.

There are various drawdown calculators on the web; this example is derived from 'My Retirement Planner' on the Aviva website.
For someone retiring in 2018, a pension fund of £180,000 would provide a drawdown income of about £8,700pa for 17 years before it is used up. This compares with the current state pension of £8,546pa. Example assumes 25% tax-free allowance £45,000 is taken.

Early in a working lifetime money locked in a pension may be seen as too inflexible.
Pay the tax and buy an ISA is then an alternative.

Lifetime ISA

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?

Property still beats a Pension

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

Last updated 14 July 2018.