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Market Commentary – March 2019

26 March 2019 | Admin

Who Wants to be an ISA Millionaire?

In 1986 the then Chancellor of the Exchequer Nigel Lawson announced the launch of Personal Equity Plans (PEPs) which were followed in 1990 by John Major’s Tax-Exempt Special Savings Accounts (TESSAs). These were forerunners to today’s Stocks and Shares and Cash ISAs respectively. As well as marking the start of a new tax year, 6th April 2019 will also mark the 20th anniversary of the launch of Individual Savings Accounts (ISAs). Like their predecessors these were vehicles designed to encourage mass market saving and investment by providing tax incentives to those who took them out. In the ensuing period these vehicles have evolved and the annual limits have increased; however the underlying principle remains as it was: investments and savings within these accounts are free from both income and capital gains taxes (CGT).

Our experience is that these vehicles are often misunderstood, so let’s explain: think of a Cash ISA as a savings account contained within a tax-free ‘wrapper’ (the ISA); think of a Stocks & Shares ISA as an investment portfolio or share dealing account which is also contained with a tax-free ‘wrapper.’ In the past there were confusing rules distinguishing between the two, with different sums available for investment. This has all now been simplified and the two are largely interchangeable. There are other ISAs in the marketplace for very specific purposes (Innovative Finance and Lifetime ISAs) but for the time being we will focus on the more popular variants already mentioned.

It has recently been estimated that there are over 1,000 ‘ISA millionaires’ in the UK ie investors who have built up this milestone sum and for whom that sum is entirely sheltered from income and capital gains taxes. Achieving this feat will undoubtedly have involved taking some risk, as investing does. Almost certainly there will have been more and less successful investments over the years. However what is also almost certain is that most of these investors will have made contributions to their ISAs on a regular basis and over a long period of time. At present, each UK  individual over the age of 18 can subscribe up to £20,000 in an ISA in each tax year. Therefore a couple starting today from scratch, could have £80,000 in tax efficient ISA vehicles on 6th April this year, using each of their annual allowances for the existing and forthcoming tax years. It is easy to see how these sums can build up fairly quickly, even before allowing for the impact of any positive investment returns. The power of frequent investing which ‘compounds’ over longer periods of time is well known, as is the benefit which can be achieved by the regular investment of smaller sums. In both cases while an investor is in ‘build-up phase’ the ups and downs in markets can actually be to the investor’s advantage as some of these regular investments will inevitably catch some of the ‘downs.’

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