Compares Cash-ISAs and 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.
Cash-ISAs are risk-free. From 1st January 2016 the government guarantee reduced to £75,000 per provider.
Between 2010 and 2014 savings were being slightly eroded by inflation.
On 04.08.2016 Bank of England reduced its base rate from 0.5% to 0.25%, a record low.
So Banks/building societies reduced their savings rates.
Savings are again being eroded by inflation.
£10,000 in a savings account returning 2.0% less than inflation loses £200.00 per year in purchasing value.
Review your accounts occasionally to ensure you continue to receive a competitive rate.
Visit a price comparison website such as comparethemarket for current rates.
From April 2016 savings interest in regular savings accounts is paid gross and basic-rate taxpayers can receive interest of up to £1,000/year tax-free:
the new personal savings allowance. £1,000 would be £40,000 at 2.5%. So Cash-ISAs are no longer the only tax-free choice.
The Martin Lewis MoneySavingExpert website has good description of savings account options.
According to HM Revenue & Customs data Cash-ISAs are more popular than Stocks-and-Shares-ISAs, in the tax-year to April 2017
80% of all ISA accounts were Cash-ISAs, the highest proportion since 2008.
Prospect of several years of low savings rates and higher inflation points us towards Stocks-and-Shares-ISAs.
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 me 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 2010-2016 was better for equities. This is illustrated by the table showing outcomes for £10,000 invested at the start of the period. As with all examples start and end dates matter, 2000-2009 included two stock-market crashes.
Sticking with the UK stock-market reduces currency risks. Using index-tracker funds spreads
risk across many shares. 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.
They can be bought over the web and are easy to understand.
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; so not everyone shares these opinions.
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.
Check out annual percentage growth for funds in sectors: Asia Pacific Ex Japan, Europe Excluding UK, Global, Japan, North America, UK All Companies to get an idea of scope.
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 the novice investor it probably offers too much information, too many choices, taking too much time.
Worryingly the number 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.
Advantages of index-trackers are recognised by Warren Buffett
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 are offering a direct-to-consumer flexi-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.
The reform is not going to improve long-term bond yields.
Withdrawls are taxed at your marginal income-tax rate.
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.
Employer contributions in addition to the tax advantages make pensions an attractive savings option.
Money locked in a pension is often 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.
Last updated 15 September 2017.