ISA market value hits a record £620 billion: why the tax wrapper is so popular with investors

By Jo Bentham5th July 2021

The most recent HMRC Individual Savings Account (ISA) statistics show the market value of Adult ISA holdings stood at a record-breaking £620 billion in 2019/20, up 6% on 2018/19.

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With 13 million Adult ISA accounts contributed to, compared to 11.2 million in 2018/19, the total amount of new subscriptions in 2019/20 was circa £75 billion – an increase of £7.1 billion on the previous 12 months. 

Furthermore, the market saw another milestone hit, as the Innovative Finance ISA (IFISA) – one of the latest additions to the ISA market, alongside the Lifetime ISA –  exceeded £1 billion in inflows

All positive news for the ever-popular ISA wrapper, its growth is unsurprising when considering its tax-free status, generous annual ISA allowance, and several products offering potential inflation-beating returns. 

 

Tax-free returns, a generous ISA allowance and a product for everyone

The ISA’s continuing popularity is due in no small part to its core tax-efficient benefit – no income or capital gains tax payable on returns made within the wrapper. 

Advantageous for all savers and investors, it’s higher and additional-rate taxpayers in particular who see the difference it makes when looking to maximise returns. Achieving 7% returns within an ISA would require an additional-rate taxpayer to achieve over 12% outside of the wrapper. 

And with an annual ISA allowance of £20,000 in 2021/22 – the highest it has been since the ISA was introduced in 1999 – as well as four Adult ISA options to choose from, there are plenty of opportunities to take advantage. 

Whether it’s a cautious saver with a low appetite for risk who wants to utilise the Financial Services Compensation Scheme (FSCS)-protected Cash ISA, or an experienced investor willing to take on more risk in the search for higher returns who is attracted to the alternative assets offered by the IFISA, there is an ISA product for everyone. 

 

Opportunities to target inflation-beating potential returns

The 2019/20 ISA uptick was driven by an increase in the number of Cash ISA accounts subscribed to, as well as a 16% increase in the market value of funds held in cash. 

But as inflation is now far outstripping the interest rates offered on both instant-access and fixed-rate Cash ISAs, experienced investors are discovering now could a better time than ever to consider rebalancing their ISA portfolio, incorporating greater risk (where possible and risk appetite-appropriate) in order to target higher, inflation-beating potential returns. 

It’s here that the medium–high risk IFISA and Stocks and Shares ISA can become their most valuable. With the former providing tax-free exposure to alternative assets and the latter the equities markets, experienced investors can expect to target potential returns in excess of 4%. 

And when looking to invest via an ISA, there’s no need to choose between products. With the ability to hold more than one type of ISA at one time, building a diversified portfolio that meets differing goals and timeframes is simple.

As an example, an experienced investor disillusioned with their rock-bottom returns on a Cash ISA could choose to subscribe a portion of their ISA allowance (or even make an ISA transfer, meaning they wouldn’t have to touch their current allowance at all) to a Stocks and Shares ISA. 

But aware of the volatile nature of the equities market and subsequent need to be invested long-term, the investor could also choose to invest some of their £20,000 into property bonds via an IFISA – offering a medium, fixed-term investment option, often between two and five years, and one where potential returns have a set date of maturity for increased visibility and better planning opportunities. 

 

Experienced investors can use an ISA to invest for impact

An increasingly important consideration for investors when deciding where to invest their capital are the societal, economic and environmental benefits that can come from it. 

A large number of investors are looking to increase the ESG weighting of their investment portfolio, and an IFISA enables experienced investors to do this – all whilst targeting potential returns higher than those often offered on mainstream investments and doing so in a tax-efficient manner. 

With an IFISA, experienced investors can back environmental projects or play a role in helping to develop a new wave of British businesses through providing SME loans. 

Or, when holding property bonds in an IFISA, experienced investors can support small and medium-sized housebuilders, providing the alternative finance needed for them to aid in tackling the UK’s chronic housing shortage.

In doing so, investors are also assisting with the UK’s post-Coronavirus economic bounce-back, as house building supports a staggering 750,000 jobs, whilst the construction sector alone contributes £31 billion to the economy each year.

 

Building an ISA portfolio

It’s not hard to understand why the ISA has become a household name. With a high, tax-free annual allowance and a product for most types of savers and investors, almost everyone can potentially benefit from the tax-efficient wrapper. 

And it’s when looking to build a wider ISA portfolio that their value becomes truly apparent. Allowing exposure to a range of assets with a variety of risk profiles and time frames, investors could see most of their saving and investing needs met through splitting their ISA allowance and building a balanced, diversified portfolio.