The ISA Crisis: Why More People Aren’t Saving in a Tax Efficient Way
Individual savings accounts (ISAs) are considered a more effective way to manage your money than other financial products. For example, a Nationwide FlexDirect current account offers an introductory annual equivalent rate (AER) of 2% for 12 months. The interest rate drops to 0.25% AER after the promotional period, which is lower than the average rate of 1.1% to 2% ISA account holders can get.
As well as offering a better overall interest rate, ISAs can maintain their interest rates for longer periods of time. It’s a similar story with regards to stocks and shares ISAs. Money invested via a stocks and shares ISA is sheltered from capital gains tax. In contrast, money invested outside of an ISA will be subject to capital gains tax. Therefore, if you can play the financial markets via an ISA, it’s often the best option.
Young people aren’t buying into ISAs
Despite these benefits, government data shows that just 13 million adults were subscribed to an ISA in 2020. Of that figure, 75% were cash ISAs, with the remaining 25% spread across stocks and shares accounts, lifetime and “innovative” ISAs. Interest in ISAs doesn’t appear to match the benefits they offer savers and investors, so the question is why? A survey by BritainThinks, in conjunction with the Financial Times, found that millennials are generally ambivalent when it comes to ISAs. Just 9% of those surveyed in 2017 had a stocks and shares ISA, with many citing a lack of financial knowledge as a primary reason for not having one. Additionally, 60% said that needing money for rent and the desire to buy a house were priorities over an ISA.
There are also several myths surrounding ISAs. Often perpetrated by the aforementioned lack of knowledge, people tend to believe that ISAs are unnecessary because they don’t pay tax on their savings. This may be true given the low-interest rates we’ve seen over the last decade. However, what if you decide to invest your savings? This is when capital gains tax becomes an issue that an ISA can solve. There is also the assumption that you need a lot of money or specialist knowledge to use an ISA. Again, these myths are unfounded. Modern ISA providers offer a variety of guides and tips on how to use their products.
Myths are clouding the benefits of ISAs
Another common ISA myth is that you don’t have any control over the investments you make. This ties in with what the Financial Times found in 2017. Millennials said that they think it’s better to have cash and that playing the stock markets is too risky and something only experts can do. The reality is that you can take full control of your investments. Products offering fractional shares allow you to invest as little as £2 and the account fees are low. Thus, what we’re seeing here is a gap in the general public’s understanding of ISAs.
This might not be the only reason for a lack of interest in ISAs. However, the current attitude towards them suggests there’s a sense of trepidation. Therefore, it’s the job of the government and ISA providers to educate the masses and explain their benefits. Using platforms such as Twitter and Facebook, creating YouTube video content and working with internet celebrities could be effective ways to do this. Whichever way it’s done, there needs to be more information about ISAs and how they can be a tax-efficient way for people to manage their money.