As ISAs approach their 20-year anniversary, it is the perfect time to look back at the history of this vital financial measure – and to look at what they could mean for your future.
The Individual Savings Account – or ISA – was introduced 20 years ago by then Labour Chancellor of the Exchequer Gordon Brown.
A way of protecting savings from the taxman, it was not a completely new idea. It replaced Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (Tessas) which both offered tax advantages. However, the Stocks and Shares ISAs and Cash ISAs offered in 1999 captured the attention of savers in a way that their predecessors never did.
It has not all been plain sailing. Maxi and Mini ISAs were an initial complication abolished in 2008. Since then, the simplicity and choice offered by ISAs seem to have captured the imagination of the saving public, and more importantly provided rewarding ways to save and invest their money.
How much could you have made?
Back in 1999, the ISA allowance was just £7,000, and the annual allowance for saving into a Cash ISA was limited to £3,000. Generous increases since then mean anyone who saved the maximum cash sum would have a £141,520 pot – plus the interest it has earned.
The annual allowance for saving into a Stocks and Shares ISA remained more generous than for cash savers until 2014. Over the same 20-year period, you could as a diligent investor have put a total of £206,500 into the stock market. If this investment attracted an annual return of 5%, your savings would now be worth £320,000.
The combination of compound interest and freedom from tax is the power behind the ISAs performance. It is hardly surprising that according to some recent estimates, something like £7.8 trillion have been invested in ISAs since they were launched.
Looking forward with an ISA
But what about the future? Can an ISA offer potential for similar growth in the next 20 years?
Of course, none of us has a crystal ball, and past performance really is no guide to future returns. However, ISAs have evolved over the past two decades. They now offer increased allowances, greater flexibility, and a wider range of investment options than they did in the past. The launch of ISAs for children, and HISA and LISA options – ISAs which can offer government bonuses to help people to get onto the property ladder and prepare for retirement. You can now spread money between cash, stocks and shares and peer-to-peer loans and move savings between a Stocks and Shares ISAs and Cash ISAs.
If you need short-term access to money, you can have it, as long as you have a flexible ISA. This lets you take money out and replace it later, without affecting your annual allowance as long as you do it in the same financial year. Bereaved spouses can also now inherit an additional ISA with a one-off additional annual allowance equivalent to the sum held in their partner’s account.
What should you do?
Whatever the future holds, it could be important to make the most of your ISA allowances and protect your savings and investments from tax.
You might want to spring clean your ISA holdings. Though you can only pay new money into one Cash ISA account each year, you are free to transfer money already held in Cash ISAs between accounts as much as you like. So, any money in accounts that no longer offer a competitive rate should be transferred to one that does.
If you are a cash saver, you might want to look at becoming an investor, and switching some of your ISA funds to a Stocks and Shares ISA.
What’s more, there are now six different types of ISA and hundreds of accounts to choose from, and some big differences between top and bottom performers. It is important to get your own ISA in order, and time is running out before the end of the tax year wipes out your 2018/19 ISA allowance.
If you need help with making the most of your ISA, at Continuum we will be very happy to provide it.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
thisismoney.co.uk – As Isas celebrate their 20th year, our guide on how to make many happy returns on your savings – free of tax – 24th February 2019
yourmoney.com – ISAs are almost 20! Here’s how much income tax you could have saved… – 14th January 2019