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Tracker Funds

ISAs - General

From April 2017 we can put up to £20,000 per year into tax-free savings whether Stock-and-Shares-ISA or Cash-ISA.
With median annual gross earnings around £31,500; the £20,000 limit is more than enough for the ordinary saver.

expand/collapse  ISA limits history table

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.

Huge variations make us cautious of equity-based savings, but ignoring equities removes the possibility of higher returns.

Bulk of returns from equities come from dividends rather than price increases.

Period 1990-1999 was exceptionally good for equities;
Period 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 below 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.

1990-199910 years£6,803£9,800£18,762
2000-200910 years£6,069£7,727£5,457
2010-201910 years£6,169£5,963£10,355


Index-Tracker funds based on ISAs

Index-tracker funds should have no initial charge and annual charges which are lower (0.05% - 0.5%) than those for actively-managed funds (0.5% - 1.6%). A 1.0% saving may not sound much, but it is one-fifth of an annual average growth of, say, 5.0% and when compounded over many years becomes a significant difference to overall return.
With an index-tracker you minimize your time researching individual funds and fund-managers.
You invest with less risk as the index-tracker is based on the whole index.
Research from the US says trackers on average, overall, out-perform actively-managed funds. By their nature they do not achieve better returns than their benchmark index.

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.

expand/collapse  Warren Buffett on advantages of Index-Trackers

expand/collapse  Growth of Index-Tracker Funds

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 £5,000 invested at start-year in various index-tracker funds.
As with all such comparisons start-year can change rankings.

Return is average rate of return in real terms after taking UK CPI inflation and platform charges into account.

Other funds tracking the same index should have similar returns.

Defined Contribution Pensions vs ISAs

We now own our own pensions. George Osborne's 2014 budget removed many restrictions on pension-pot withdrawls for people retiring after April 2015.

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 or teacher with a defined benefit pension.

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.

Cash ISAs/Savings-Accounts

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.
£200.00 purchasing value lost each year over 5 years is £1000.00.

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.

Last updated 02 November 2021.