15th anniversary of the ISA wrapper
24 March 2014 - The start of the next tax year marks the 15th anniversary of the ISA wrapper. It started its life under a bit of a cloud as the maximum allowance was lower than its predecessor, the PEP, and, over the years, some of its tax advantages have been cut.
However, in his Budget statement on 19th March 2014, the Chancellor of the Exchequer announced significant changes which have boosted the advantages of the tax-wrapper.
Calculations by Chelsea show that investors using the ISA wrapper, are thousands of pounds better off over the last 15 years and, with the new flexibility, should continue to benefit in years to come*.
£100,000 of tax-free gains for investors
If an investor put the maximum allowance into the best-performing fund (Marlborough Special Situations) on 10th April each year, they would have invested a total of £121,000 and have a pot of money worth £518,550. All free from capital gains, thanks to the ISA wrapper.
Now not all investors will have been lucky enough to invest in this fund, but an investment in the average fund of the consistently most popular sectors of UK Equity Income and UK All Companies, would still have sheltered thousands from the tax man.
Putting the maximum allowance into the average UK Equity Income fund and UK All Companies fund each year would have resulted in a pot of money worth more than £214,000 and £218,000 respectively. That's almost £100,000 of tax-free gains.
Cash ISA savers better off too
It may be shaping up to be the worst ISA season for cash rates, but savers shouldn't dismiss the advantages of the tax wrapper.
Someone saving the full allowance into a Cash ISA would have earned more than £20,500 in tax-free interest and have a total savings pot worth more than £76,572**.
Basic rate tax payers who have done this have made almost £5,000 more in returns than they could have with a standard easy-access savings account, while higher-rate taxpayers are more than £9,000 better off.
Regular savings prove best for emerging markets
The 15 years also provides a good example of how regular savings in riskier markets can be a more profitable, and less volatile way of investing. Looking specifically at the Global Emerging Markets (GEM) sector, lump sum investments of the full ISA allowance into the average GEM fund would have given an investor a pot of money worth £222,545, but with some spectacular ups and downs*.
In contrast, investing the full allowance via monthly savings would have given you a pot of money worth £224,531 - almost £2,000 more and without some of the drama.
Darius McDermott, managing director of Chelsea comments: “There really isn't any reason not to use the ISA wrapper for your annual cash savings and investments. Why give the tax man more than you need to, when you yourself could be benefiting?”
Best-performing funds over 15 yearsOf the 537 retail funds available since ISAs launched in April 1999, the best performing by far are those investing in UK Smaller Companies – four of the top five performing funds come from this asset class, with Marlborough Special Situations topping the bill at 1,520.49%. It is followed by Artemis UK Smaller Companies (882.10%), Investec UK Smaller Companies (788.10%), BlackRock UK Smaller Companies (736.41%) and First State Asia Pacific (692.44%).
Seven funds have produced negative returns, with the worst being Manek Growth at -33.54%. The others were: Henderson UK Strategic Income (-30.58%), Threadneedle Japan (-16.47%), Baring Japan Growth (-15.01%), Scottish Widows Japan Growth (-7.19%), Kames Global Equity (-2.48%) and Investec Global Dynamic (-1.82%).
Best and worst performing sectors over 15 years
Top five IMA sectors:
1) China/Greater China 379.64%2) European Smaller Companies 377%
3) UK Smaller Companies 285.74%
4) Asia Pacific ex Japan 279.39%
5) Global Emerging Markets 275.48%
Bottom five IMA sectors :
1) Japan 22.84%
2) North America 50.08%
3) Technology and Telecommunications 54.86%
4) Global Equity Income 64.30%
5) UK Gilts 68.74%
Cash ISA interest rates returned 36.64%
Important notes:
*Investment returns are sourced from FE Analytics. Lump calculations were made by investing the maximum allowance on 10th April each year and monthly savings made on 10th of each month. There is still £960 of this year's allowance uninvested in the monthly savings calculations as the data was taken on 5th March 2014.
**Cash ISA figures are sourced from Moneysupermarket.com
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. Darius' views are his own and do not constitute financial advice.