AJ Bell press comment – 8 June 2022
- Investors put a record £33.9 billion into stocks and shares ISAs in the tax year ending 2021, according to HMRC figures released today
- That is nearly £10 billion more than the previous year
- Cash ISA subscriptions, however, declined by £12 billion
- Junior ISA contributions also hit a record, breaching the £1 billion mark for the first time
- 50,800 Lifetime ISA holders used their account to buy a property
- High earners still aren’t maxing out on ISAs
Laith Khalaf, head of investment analysis, AJ Bell:
“The arrival of successful COVID vaccines, combined with high levels of pandemic savings and ultra-low interest rates, gave investors both the means and motivation to put a record-breaking amount into stocks and shares ISAs in the tax year ending 2021. The number of people subscribing to an account rose 860,000 on the previous year, and collectively contributions were nearly £10 billion higher.
“Cash ISAs went in the opposite direction, however, with 1.6 million fewer people paying into a Cash ISA versus the previous tax year. Total cash ISA contributions fell by £12 billion to £36.9 billion.
“Overall, that means total ISA contributions to both Cash and Stocks and Shares components combined fell back by £2.4 billion, thanks to the decline in Cash ISA saving. A resurgent stockmarket clearly stole the limelight from the paltry rates that were on offer from Cash ISAs, but more broadly Cash ISA subscriptions have been in decline since the personal savings allowance was introduced in 2016. This allowance means savers can receive up to £1,000 of interest tax-free, which undermines the need for many consumers to use a Cash ISA wrapper to protect their money from tax.
“That’s particularly the case when interest rates are low. At an interest rate of 1%, a basic rate taxpayer would need £100,000 in cash before they benefited from the Cash ISA wrapper, as a result of the personal savings allowance protecting that level of interest from tax anyway. But as interest rates rise, Cash ISAs will probably enjoy a bit of a recovery, both because the rates themselves will become more attractive, and more savers will actually save tax by using the ISA wrapper. At an interest rate of 3%, basic rate taxpayers start being liable to tax once their cash savings exceed £33,333. For higher rate taxpayers it’s half this level as they only receive a £500 annual allowance, and additional rate taxpayers don’t get any allowance at all.”
“Junior ISA subscriptions also hit a record level of £1.1 billion, the first time they have breached the £1 billion mark. But the 10% rise in subscriptions perhaps flatters to deceive when considering that the Junior ISA allowance was doubled to £9,000 in the tax year in question. Cash is still king in the land of the Junior ISA – of all the JISAS paid into, over two thirds were cash accounts and stocks and shares attract only 43p in every £1 contributed to JISA accounts. So while parents seem to have shifted towards the stock market with their own ISAs, they have been more reluctant to do so with their children’s savings.
“That doesn’t make a huge amount of investment sense, given that children potentially have the longest savings horizon in which to ride out the ups and downs of the stock market to harvest higher returns. However, some parents may be saving for a specific event at age 18, such as a university fund, which truncates the investment period somewhat. Others may simply be conditioned to dealing in cash when it comes to saving for children. But for younger children especially, some parents may well be missing a trick by avoiding the long term growth potential offered by investing in the stock market.”
“Over 50,000 people used a Lifetime ISA to buy their first house in the last tax year, which brings the total number of individuals who have used this scheme to purchase a property to 118,100. On average, withdrawals were £13,192, which means that the typical Lifetime ISA encasher benefited from around £2,600 of upfront government tax relief, including the growth on that money.
“While some criticised the scheme when it was introduced in 2017, it has clearly helped lots of people to get on the housing ladder, and will continue to do so as more accounts mature. The government did reduce the early exit penalty charge during the pandemic from 25% to 20%, and they could look at this again to help out with the cost of living crisis. That would help those who have done the right thing by saving for their future, but now find themselves in more difficult financial circumstances and in need of access to that money.”
ISA holders analysis
“In total, £687 billion was held in adult ISAs in April 2021, which really is a mark of success of the ISA product in its 21st anniversary year. There are 27 million adult ISA holders in the country, fairly evenly split between genders, and the average ISA holder had an income of between £20,000- £29,999, which all goes to show that the ISA is really an account for pretty much anyone who wants to save money for their future.
“Of course, generally speaking, the more money you earn, the more your propensity to save into ISAs. But what is quite curious is that some high earners don’t seem to be maxing out on their ISA contributions, despite having the discretionary income to do so, and facing high tax rates on their savings and investments. Only 39% of those ISA subscribers earning between £100,000 and £149,000 paid in their full allowance in the 2019/20 tax year, despite having marginal tax rates of up to 60%. Six out of ten ISA subscribers earning over £150,000 used their full ISA allowance, but that means four in ten did not. And these numbers don’t even include the people earning these amounts who didn’t contribute to an ISA at all. All of this suggests that there is a rump of high earners who are letting some of their valuable ISA allowance go begging each year, and therefore paying more tax than they need to.
“The latest ISA statistics show that people’s ISA holdings generally increase with age, with the average ISA holding for over 65s being £46,090, compared to £6,366 in the 25-34 age group. That reflects the much longer period over which older ISA savers have been able to make contributions, and the additional growth they have experienced, thanks to interest and growth compounding over time. 70% of ISA holders over 65 didn’t contribute to an ISA in 2019/20, however, no doubt because many of them are now enjoying the fruits of their tax-free savings, which is of course what ISAs are all about.”