It regularly occurs to me that the British are harsh when it comes to embracing what it is they, or we I should say now after all my years here, do really well. We’re amazing at rallying against matters which are wrong or need improvement. But the other side of the coin still seems to make us feel uncomfortable, we don’t seem very happy to not just recognise, but champion those things in our society which are in fact world class? And in the area of saving products, is the unsung national champion the ISA?
Maybe it is because my career has taken me from my native homeland in Australia, to working, living in and covering many markets globally to make the point – British ISAs are potentially the best medium-term savings product globally.
I stand by that statement. The problem is not just that they are not used very well, they’re used badly.
Our wealth industry needs to better embrace this wonderfully simple and mostly low-cost product for the benefit our customers and the nation.
Pensions, being long term saving products, are by their nature complex. Singapore and Australia lead the way in making it relatively simple while the USA and UK have masterfully cornered the market in pension complexity. Pension products usually require you to lock your money away without any access until retirement. And the tax incentives are designed to encourage you to invest for the long term despite that lack of immediate access.
What though if you don’t want to lock your savings away for so long? What if you want a tax advantaged savings product which also gives you immediate access today? That’s where our under recognised, underappreciated World Champion comes in – The ISA.
Many of us miss the great simplicity of ISA’s. A couple can invest £40k per year and Junior ISAs (or JISAs) now have a £9k pa limit per child; whatever your income level. For a family with two kids that may well compound to more than a £1m of family balances over 10 to 15 years. All with immediate access if that’s needed. On the world stage, that’s pretty impressive. And yet, despite these attractions ISAs remain greatly under-utilised and misused.
According to the most recent Government statistics (2018-19) around 11 million UK Adults invested in an ISA product, roughly 20 per cent of the UK Adult Population. What staggers and worries me is that this is about the same number of Brits that have already speculated in Bitcoin.
But what’s even more concerning is the overwhelming majority of ISA’s are held in cash – 76 per cent in fact. Even with their tax advantages the impact of inflation means the purchasing power of these “safe” cash balances actually goes backwards over the longer term.
At least half, maybe even two thirds of ISA balances should be placed in competitively priced stock and shares ISAs. To observe three quarters of ISA balances in cash says to me that ISAs aren’t really helping the UK’s medium-term savings pool in the way they best could.
That’s not an ideal policy outcome.
We recently commissioned our own research and it’s consistent with the Government ISA statistics. We were specifically analysing UK parents, their savings habits and attitudes towards family saving.
Encouragingly we found three quarters of parents were actively saving money for their children. But the overwhelming majority – at 83 per cent – are doing so in cash. Of those parents actively saving, nearly half are saving cash in a standard bank account that belongs to their child, with just one in three utilising a Junior Cash ISA.
And now during our Covid lockdowns, savings and deposit balances have increased greatly across the banking industry. How will those balances be used? Spend up as we can, stay in cash or make use of ISAs, the best savings product globally.
Along the way our industry has largely forgotten to educate our customers about Albert Einstein’s 8th wonder of the world, compound interest. Our parents want to save for their children’s long-term benefit, yet they place those savings in cash because it feels “safe”. And even for their own adult ISAs they’re still placing three quarters are in cash. It’s not a good outcome.
Looking forward with the JISA limit now increasing to £9,000 pa, we are presented with an opportunity to market appropriately a fantastic long term savings product for our children for their benefit.
This is a benefit now not eaten up by the usury commissions of the past life insurance industry, or even large swathes of the wealth management industry that still charge high up front commissions and exit fees. There are real wealth accumulation possibilities now that products offer lower “all in” annual costs, which ought to be well under 1 per cent for JISAs and ISAs. Let’s hope that we see all providers offering similar prices and also helping people understand that with medium term savings in mind, investing in well diversified stock and shares ISAs is vital. Cash, unfortunately, is not always king.