Despite their popularity, long history and the potential offered for compounding returns tax-efficiently it is surprising that according to anecdotal evidence there are only around 100 ISA millionaires in the UK out of a total of 24.3 million people who hold ISAs.
A staggering £442.8 billion was held in Cash and Stocks and Shares ISAs at September 2013 with the average value of a Stocks and Shares ISA worth £25.9k in April 2011 (all data from HMRC Individual Savings Account (ISA) Statistics, September 20131).
It seems odd that this hugely successful scheme to encourage savings and investments should have been the subject of a debate by policy wonks at the Treasury on placing a cap on the value of an individual ISA, in a manner similar to the lifetime allowance in an approved pension scheme. This might have been prompted by concerns over a few investors doing very well but given the estimated annual tax cost to the Exchequer of ISAs in 2012-13 was just £1¾ billion1,2, or 0.4% of the value of total assets held, the average tax cost per ISA holder to the Exchequer is just £71.85 per annum.
A better discussion might have been had around how to encourage the public to become more astute in their savings and investment decisions, even more relevant now following the banning of commissions for the provision of financial advice to retail customers at the end of 2012. This should start by explaining why Stocks and Shares ISAs generally perform better than Cash ISAs. The average Cash only ISA was worth just £7.35k in 2011 despite securing nearly 70% of investors’ annual contributions. Lower contribution limits, low interest rates and regular withdrawals are all to be blamed. The power of compounding is not being given a chance to work.
In a Stocks and Shares ISA, particularly a self-directed one, compounding has greater scope to produce its magic. Someone making the maximum contribution each year to a Stocks and Shares ISA since the savings wrapper was launched in 1987 (initially as a Personal Equity Plan or PEP which were merged with ISAs in 2008) could have amassed tax-free savings worth around £649,325 had he or she only matched the performance of the FTSE 100 (on a total returns basis), around 7.66% p.a. A married couple making the maximum contribution and achieving the same annual return would be worth £1,298,6493. The…
