92% of Individual Savings Account (ISA) holders are under-investing their savings and missing out on ISA tax-breaks available to them partly due to high commission costs.
An analysis of HMRC data shows that of the 13.8 million ISA account-holders in the UK, 12.7m are only using a fraction of their annual tax-free allowance, while 88% are using up to just over half. The tax free allowance for ISAs in 2017/18 is £20,000.
More disposable income than ever but people do not save
The under investment in ISAs is not explained by low levels of disposable income, as this has been rising strongly since the credit crunch, but is partly caused by the financial services industry’s failure to make its ISA products more attractive or usable, something Moneyfarm is aiming to abolish with an intelligent, low-cost and simple alternative for it’s users.
The number of ISAs opened has fallen continuously in recent years, just under 13 million ISAs were opened in 2014/15 – down from 13.5 million in 2013/14 and 14% down on the 15.2 million ISAs opened in 2010/11 when numbers peaked.
The main drivers for savers choosing to under-invest in ISAs, is the poor quality of existing ISA products – which are not user-friendly and often come with high commission costs attached to them which lead to low net returns. Often the negative real returns on cash savings can also make it difficult for savers to see the benefits of investing larger sums.
With so many obstacles discouraging saving through traditional ISA products, it is little wonder that people are not taking advantage of their full ISA allowance – the wealth management industry needs to do more to encourage savers.
ISA providers need to combine low cost with accessibility
While the tax incentive is undoubtedly attractive, if the industry really wants people to save through ISAs, it needs to lower its management fees and bring its products up to speed with the 21st century.
The landscape is changing and investors are demanding lower costs and greater accessibility. These are very important factors in today’s world – and ones that, until now, have not been fully taken into account by the wealth management sector.
While everyone is entitled to an annual tax-free allowance of ISA savings, if this goes unused within the given tax year, it cannot be carried over to the next – meaning many are losing out on several thousand pounds worth of savings each year.
Savers should maximise their allowance each year in order to reap the full benefits of an ISA – otherwise it is a case of ‘money down the drain’.
However more needs to be done to encourage people to take advantage of the savings to be made.
Still wondering what an ISA is? Our Head of Investor Consultants, Henry Black, explains.