It’s hard to believe, but individual savings accounts (ISAs) have been with us for almost a quarter of a century since arriving in 1999. These tax-efficient vehicles, which have revolutionised how millions of people save and invest, have undergone many changes over the years. We also have a number of ‘ISA millionaires’, which demonstrates the value of long-term investing and compounding.
Here, we look at how they’ve developed and the current rules that are in place, as well as a few fund suggestions for this year’s ISA allowance.
ISAs replaced personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs). Over the years they have been gradually simplified and improved to make them more attractive and user-friendly to potential investors. The maximum annual investment in ISAs used to be just £7,000. However, this total has gradually risen over the years to its current £20,000 level. The number of products making up the broader ISA family has also increased with the likes of the Junior ISA being added. The UK Government has also removed some of the restrictive rules that were originally in place to enable various ISA savings pots to be more easily transferred and withdrawn.
Around 12 million Adult ISA accounts were subscribed to in 2020 to 2021, according to the latest official Government figures*. While the number of cash ISAs subscribed to decreased by 1.6 million, the number of stocks and shares ISAs rose by around 860,000*. The figures also reveal that around £72bn was subscribed to these Adult ISAs in 2020 to 2021*, with the amounts subscribed to stocks and shares ISAs increasing by £10bn since the previous year*. The market value of Adult ISA holdings was £687bn at the end of 2020 to 2021 – 11% up and driven by a 31% increase in the market value of funds held in Stocks and Shares ISAs*.
So, what are the current rules? You need to be at least 16 years old to have a cash ISA and 18 years old or over for a stocks and shares ISA. Currently, you can save up to £20,000 in each tax year – which runs from 6 April to 5 April – in either one account or split the allowance across a Cash ISA and Stocks and Shares ISA. Up to £9,000 can go in a Junior ISA. You can invest in the shares of companies, unit trusts and investment funds, corporate bonds, and government bonds.
Now that we’ve covered the broad history of ISAs and the various rules that are in place, it’s time to look at how you might like to invest your annual allocation. The big question is: where do you start? Here we take a look at some fund suggestions.
As at the time of writing, inflation stands at a lofty 10.5%** in the UK, yet the impression we get from many of the managers and economists we speak to, is that this figure will fall markedly in 2023. That is good news for the bond market, where we are now seeing starting yields of 5%. This, coupled with a good opportunity for capital gains, makes the asset class an attractive option once again.
A fund we like in this space is Royal London Corporate Bond. It offers access to a portfolio of predominantly, but not exclusively, investment grade corporate bonds. The manager has proved adept at identifying bonds that offer superior risk-adjusted returns. The process is risk aware and concentrates on avoiding losers rather than picking big winners, with the goal of providing an attractive and stable income over time.
As for equities, I firmly believe now is not the time to run for cover – many markets have been hit hard and now look a lot cheaper from a valuation perspective. A year ago China was so risky it almost felt untouchable to an end-investor. However, attempts to tackle the troubled property sector, the relaxation of Covid restrictions, coupled with extremely attractive long-term valuations, mean China is becoming interesting again.
FSSA All China is an option here. Unlike many Chinese equity funds, FSSA All China invests across the whole market including the vast A-share market which is often ignored by many international investors. The managers invest in long term, sustainable growth opportunities, with a heavy emphasis on finding high quality businesses and management teams.
Japan is also looking good value and the domestic outlook is improving as the country re-opens its borders.
Here an option is AXA Framlington Japan which invests in Japanese companies of varying sizes but tends to have a slight bias towards smaller companies. The manager invests in firms with long-term growth prospects which are independent of short-term news flow or what is going on in the wider economy.
Then there is UK equities – which always seem to be in the eye of the storm. Take small-caps as an example - research from Montanaro shows that at 8.6x, UK Small Cap is now trading on its lowest P/E since 2009 - it was as high as 15.9x in December 2020**. Many of these innovative, manager-owned businesses have shown they can navigate challenging times and come out stronger – why should it be different on this occasion?
Liontrust UK Micro Cap has been on the Chelsea Selection for some time. This fund applies the team's proven ‘economic advantage’ investment process to micro-caps - a part of the market that tends to be under-researched. Investing in Britain's smallest businesses, the fund follows in the footsteps of the successful Liontrust UK Smaller Companies and Liontrust Special Situations funds.
A number of quality UK mid-caps have also been hit hard purely on sentiment, while the UK remains the most mature market for income – which has recovered well from the challenge of Covid.
Here, one option would be abrdn UK Mid cap equity. It’s a high conviction strategy which invests in medium-sized companies for the long term. It invests in businesses when they are well established, but still have a long runway of growth potential. The process leans on ASI’s quant screening tool, ‘The Matrix’, and is backed up with rigorous fundamental research and regular company meetings.
*Source: www.gov.uk, Commentary for annual savings statistics, June 2022
**Source: Montanaro Asset Management – December 2022
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.