Remember last year’s Isa season? Unfortunately, it was memorable for all the wrong reasons.
It went down in history as the “worst Isa season ever”, thanks to a double whammy of rock bottom savings rates and volatile stock markets.
Too many savers simply stayed at home, and who can blame them, given that most banks and building societies didn’t show up to the annual party either.
Dash from cash
In March last year, the top easy access Isa was paying a miserly 1.15%, according to Moneyfacts, against 3.15% five years earlier.
Near-zero base rates weren’t the only culprit, the Funding for Lending Scheme was also to blame, as banks and building societies simply did not need to chase savers’ money.
The personal savings allowance, which allows basic rate taxpayers to earn £1,000 of interest before paying income tax, or £500 for higher-rate taxpayers, also dampened enthusiasm, as more than nine out of 10 now pay no income tax on their savings interest.
This wasn’t just the worst cash Isa season ever, it was also the worst for stocks and shares Isas.
Fund sales collapsed as investors took fright of volatile markets, following January’s China meltdown.
Net fund sales totalled just £237 million, less than half the £563 million sold the year before, the lowest level since the Investment Association began compiling records.
Across the tax year net fund sales totalled £1.5 billion, well down on the previous year’s £2.6 billion.
Most investors played safe by choosing more conservative investments such as bonds, multi-asset and absolute return funds, rather than equity funds.
There was another factor behind last year’s damp Isa squib. Pension freedom changes, introduced in April 2015, made pensions more attractive, and savers may also pass their pot onto their family free of inheritance tax.
It also looked as if higher rate pensions tax relief may be under threat, which fuelled pensions scramble.
Size isn’t everything
Last year’s no-show happened despite Chancellor George Osborne hiking the Isa limit from £11,520 to £15,000. This suggests that IFAs should not get too excited about the next hike, to a hefty £20,000 from 6 April.
Indeed, the higher allowance may backfire, by reducing the sense of urgency as the annual deadline approaches. Although the annual allowance is still issued on a “use it or lose it” basis, only the wealthy few will worry about losing a benefit they only partly use anyway.
The irony is that the worst ever Isa season was actually one of the best ever times to invest. On 5 April, the FTSE 100 closed at 5920. At time of writing, it stands at 7260, a rise of almost 23%. Throw in the yield, and you are looking at a total return of more than 26%. This would be free of tax inside an Isa.
Latest Investment Association figures show net retail equity fund sales finally rising in November, following 10 consecutive monthly outflows.
Last year rubbed some of the shine of Isas, which may struggle to recapture their former glories.
This is unlikely to be the best ever Isa season, but it certainly shouldn’t be the worst.