Compares Cash-ISAs/Savings-Accounts with Stocks-and-Shares-ISAs
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 median annual gross earnings around £29,600; the £20,000 limit is more than enough for the ordinary saver.
ISA limits history table
|Tax year||Overall ISA Limit||Cash ISA Limit|
Cash-ISAs and savings-accounts are risk-free. Savings are protected up to £85,000 per provider by the Financial Services Compensation Scheme.
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
With the personal savings allowance introduced in April 2016, savings interest from 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 £50,000 at 2.0%.
So Cash-ISAs are no longer the only tax-free option.
Cash ISAs lose popularity
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.
The trend continued in 2017-2018, an additional £7.8bn invested was almost entirely Stock-and-Shares-ISAs.
Cash ISA's still account for 72% of all ISA subscriptions.
Stocks and Shares ISAs
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 rose to around 7770 during the first 6 months of 2018 and fell to 4993 in March 2020.
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 2010-2019 was good 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 (up to 5% for other funds) and
annual charges which are lower (0.05% - 0.5%) than those for actively-managed funds (0.5% - 1.6%).
Research from the US says trackers overall, on-average, out-perform actively-managed funds.
Keep your expectations realistic:
FTSE All-share index funds averaged 3.4% annual growth over the 19 years 2000-2018, which is 1.9% in real terms.
They averaged 7.3% annual growth over the 16 years 2003-2018, which is 6.3% in real terms.
The difference: FTSE funds suffered falls in the years 2000-2002.
Invest in funds tracking the broadest indexes.
Invest for the long-term. Remain a passive investor, do not keep chopping and changing funds incurring fees as you go.
Warren Buffett on advantages of Index-Trackers
2019 ends strong decade for stock markets and index funds
Assets managed by global index funds exceeded $10tn reported in Financial Times on 08 January 2020.
Index funds have gained the most ground in equities above all in the US.
2020 coronavirus recession
In the first three months of 2020 the value of my FTSE All-Share index tracker funds fell to 65% of their end-of-2019 value.
How long will it be before the funds regain their value?
Maybe Two Years.
Based on month-end FTSE All-Share TR index during 2008 financial crisis:
Peak before crash: 4123 October 2007
Fell to: 2429 February 2009
Recovered to: 4154 March 2011 (two years)
For latest situation see Coronavirus Crash page.
Fund Platform Charges
It seems buying an index-tracker ISA direct from the provider is increasingly phased out and replaced by buying via a fund platform.
Using a fund platform adds an additional annual 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.
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.
Monevator has lots on Passive Investing (passive investing is another name for investing in index-tracker funds).
Easier reading, lighter style than this page.
comparefundplatforms another calculator from Candid Money.
Searching for Suitable Index-Tracker Funds
Vanguard 'what we offer', index and active funds enquiry. Good information, easy to use, designed for a UK audience.
You do not need to be a Vanguard customer to use the enquiry.
Vanguard platform only covers Vanguard funds.
Vanguard platform has the lowest admin charge(0.15%) and Vanguard index funds have low annual charges.
Hargreaves Lansdown Search index tracker funds enquiry. Good information, easy to use, designed for a UK audience.
You do not need to be a Hargreaves Lansdown customer to use the enquiry.
Covers index funds which can be purchased via the Hargreaves Lansdown platform.
Morningstar Funds, funds screener, morningstar-sustainability-rating-all, enquiry ... and use funds search box.
Free, topical, reliable and comprehensive but takes a bit of getting used to. Includes all funds not just index-trackers.
Performance tab is handy.
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 £5,000 invested at start-year in various index-tracker funds.
As with all such comparisons start-year can change rankings.
- Start Year
|FTSE USA Index||Legal & General US Index Trust R Acc|
|FTSE Developed World ex U.K. Index||Vanguard FTSE Dev World ex UK Equity Index Acc|
|FTSE Japan Index||Legal & General Japan Index Trust R Acc|
|FTSE World Asia Pacific ex Japan Index||Legal & General Pacific Index Trust R Acc|
|FTSE All-Share Index||Legal & General UK Index Trust R Acc|
|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 your 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.
Tax advantages make pensions the most attractive savings option, better than ISAs.
Employer contributions increase the attraction.
All this assumes you are not a nurse, teacher, etc with a defined benefit pension.
Generally you must transfer your pension pot to a company that provides drawdown when you 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 at age 65, a pension fund of £180,000 would provide a 25% tax-free allowance £45,000 and a drawdown gross income of about £8,700pa for 17 years before the remaining £135,000 is used up.
This compares with the 2018 state pension of £8,546pa. Benefits of drawdown include continuing returns from invested funds and the feeling of personal control.
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.
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.
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
Defined-Benefit and Defined-Contribution Pensions
Over the period 2008 to 2018 the number of active members of private sector defined-benefit pension schemes
continued to fall from 2.6 million to 1.1 million. We are living longer and investment returns are falling. Employers withdrew
from defined-benefit schemes, many switched employees to defined-contribution schemes.
Membership of defined-contribution schemes increased after the October 2012 introduction of automatic enrolment to 9.9 million in 2018.
Membership of public sector defined-benefit schemes gradually increased to 6.2 million.
Private sector defined-benefit schemes are 'funded'. Contributions from employer and employee are invested in a
pension fund used to pay the benefits.
Average contributions rates as % of pensionable earnings, 2018.
Public sector schemes for teachers, NHS workers, police, fire service, armed forces and civil service are 'unfunded', they are
not linked to specific pension funds, the pensions are paid out of general taxation.
Every two years the Office for National Statistics (ONS) publishes a wealth survey.
Private pension wealth includes defined-benefit pensions, defined-contribution pensions and personal pensions.
Annuity factors are used to value 'unfunded' defined-benefit pensions as if they were to be transferred to another pension provider.
Defined-benefit pensions account for 80% of the private pension wealth, the remaining 20% being split roughly equally between defined-contribution and personal pensions.
Household wealth increases with age until pensions are drawn.
There is no inheritable wealth from defined benefit pensions.
Generally there is no inheritable wealth from an annuity.
Last updated 02 October 2020.