• The UK’s £153 billion cash war chest
• Interest rates are at record lows
• Tax rises are in the post
• The economy is poised to expand
• ISA allowances have never been this generous
Laith Khalaf, financial analyst at AJ Bell, comments:
“A huge cash war chest has been built up by UK consumers over the course of the pandemic as a result of being cooped up at home, and we can expect a fair chunk of that to be deployed in ISA season. With interest rates so low, and attention hopefully turning to post-pandemic life, it could therefore be a bumper year for Stocks and Shares ISAs. No doubt some of that cash will be spent once the economy opens up again, but the Bank of England estimates it will only be 5% of the excess savings built up.
“Savers and investors know that tax rises are in the post, and ISAs offer valuable tax protection for the dividends and capital gains produced by an investment portfolio. The Bank of England expects the UK economy to expand by 14% over the next year, which should be supportive of equity markets. This prediction is based on the UK remaining in lockdown until April, and then opening up gradually over the spring and summer. Clearly the big risk to this forecast is the pandemic takes a turn for the worse.
“Stock markets have also been doing well since the results of the Pfizer vaccine trials were announced in November. While that lends some confidence to investors, there are legitimate concerns that markets have got ahead of themselves, which could spell volatility ahead. The perfect antidote to choppiness in the markets is a regular ISA investment plan, which makes for a smoother journey. One of the great things about ISAs is that you can secure this year’s £20,000 allowance by making a lump sum contribution by 5th April, but you can then drip feed it into the markets gradually, as you see fit.”
Five reasons why it might be a bumper year for Stocks and Shares ISAs
1. The UK’s cash war chest. Households built up £153 billion in bank and building society cash accounts in 2020, compared with £55 billion in 2019 (source: Bank of England), an additional £98 billion. With a fresh lockdown in force since the start of the year, the pennies are still accumulating. The Bank of England expects households to spend 5% of their excess savings in the economy as restrictions are lifted. That leaves 95%, or £93 billion, which would be expected to remain in savings. A fair chunk of this money is likely to find its way into ISAs in the next two months.
2. Record low interest rates on cash. The average rate on instant access deposit accounts sits at 0.06% and on Cash ISAs siting at 0.32% (source: Bank of England), while the FTSE 100 is yielding just over 3% (source: Refinitiv). The Bank of England expects inflation to be 2.1% over the next year, so most cash in the bank is going to be losing its buying power. For investors looking to put money away for the longer term, the stock market looks more attractive than cash, albeit it carries higher risk.
3. Tax rises are in the post. Whether they happen at the March Budget, or later in the year, the Chancellor has a fiscal black hole to fill. In November, the OBR estimated the Chancellor would need to find up to £102 billion in tax rises and/or spending cuts by 2025/26 to balance the books. Clearly that was before the latest lockdown took another swipe at UK economic activity, and left the government paying out even more in coronavirus support measures. Capital gains tax looks like it’s in the firing line after the Office for Tax Simplification recommended a rise in rates to the Chancellor. Tax rises make an ISA wrapper even more valuable because it shelters gains from CGT, and dividends from income tax.
4. The economy is poised to expand. The Bank of England expects the UK economy to grow by 14% over the next year, assuming vaccines help deliver us from social restrictions gradually over the spring and summer. That growth is clearly largely repairing the damage that has been done by the pandemic, but a rapidly expanding economy should be supportive of share prices. As ever, there are plenty of downside risks too, so it makes sense to drip feed money into the market gradually. To secure this year’s ISA allowance you do have to contribute by 5th April at the latest, but you are allowed to initially hold that contribution as cash and then invest it at your leisure.
5. Allowances have never been this generous. When it was introduced in 1999, the Stocks and Shares ISA allowance was just £7,000, but it now stands at £20,000, with the allowance last increased in 2017. At the same time the LISA was introduced, which allows younger ISA investors to get a £1,000 tax relief bonus for a maximum £4,000 annual contribution (the £4,000 sits within the overall ISA limit of £20,000 though). This year the Junior ISA allowance has more than doubled, from £4,368 to £9,000, meaning ISA allowances have never been this generous.