With a huge selection of ISAs at advisers’ disposal this tax year-end, Ben Heffer, Insight Consultant at Defaqto, reminds why it’s important for advisers to understand the current ISA market and how to best advise clients who like to take full advantage of their ISA allowances before 5th April.
In this exclusive analysis, Heffer talks about the options advisers should discuss with their clients, the key points of differentiation and market changes over the last twelve months.
As the end of the tax year approaches, it’s important for advisers to understand the current ISA market and how to best advise clients who like to take full advantage of their ISA allowances. Such clients will want to ensure that they have invested the full £20,000 amount for this tax year ahead of 5th April. With latest government figures recording total adult ISA holdings in excess of £741bn, ISAs remain an important savings vehicle for many people; but, with more than 500 ISA managers registered with HMRC, what are the options that investors should consider?
This article sets out the key points of differentiation illustrated with examples of market changes over the last twelve months.
Defaqto’s Matrix database holds details of 521 different cash ISAs from 90 or more banks and building societies, and 325 different stocks and shares ISAs including junior ISAs and lifetime ISAs from 141 different ISA managers.
Minimum investment
The typical minimum investment for adult ISAs is £1,000 or £50 per month where regular premiums are accepted, although providers which offer IHT/IHT AIM ISAs tend to have higher investment amounts of £10k plus. Many Junior ISA only require a nominal minimum investment, but a significant number require £1,000 and one even £2,500. Similarly, those accepting regular contributions typically require at least £10 per month but some require £100 or more. The lower thresholds, particularly for Junior ISAs, brings the product within the means of more investors.
In January 2024, the Charles Stanley Direct minimum monthly investment decreased from £50 to £25; from February 2023, Triodos Bank Stocks & Shares ISA started accepting a monthly investment of £25 per month; and from April 2023, the minimum monthly premium for the SVM ISA is £50 per fund.
Charges
Relatively few ISAs have an initial charge, but some charge between 1% and 5% of the investment. Many ISA products are associated with an adviser platform, consequently, just 79 products have a product annual charge, the remainder levying charges at the platform level and some relying purely on the fund charges on the underlying investments to pay for the product. It is important to take into account all the charges that a client will incur throughout the value chain to identify the true cost, particularly in the light of fair value requirements.
In February, Triodos Bank moved from a flat 0.4% fee to 0.4% on first £250k and 0.2% on £250k+.
With effect from December 2023, the 0.30% management charge for the Vanguard Managed ISA is no longer capped, but the 0.15% account fee is capped at £375 per annum.
Back in May 2023, the annual fee for the evestor ISA changed to 0.5% (0.40% annual management fee + 0.10% administration fee paid to a third party). In April 2023, the annual charge for Chelsea FundStore Junior ISA was set at 0.15%; and in March 2023, the Hargreaves Lansdown LISA charge was reduced to 0.25% per annum and the charge for the JISA removed.
In February 2023, the service fees for the Lloyds and HBOS ISAs were capped at £36 per annum.
Flexibility
An important consideration is flexibility. Of the 141 ISA managers, only 51 offer flexible ISAs. Flexible ISAs permit previously withdrawn money to be returned to the ISA within the same tax year without further contributing to the investor’s annual allowance. This means that people can have access to their money, on a temporary basis at least, without diminishing their ISA portfolio. Whilst little more than a third of managers allow flexible ISA, more managers are moving in that direction: in February last year, the abrdn FundZone and Wrap Stocks & Shares ISAs became Flexible ISAs, followed by Aegon Retirement Choices ISA in July and Parmenion ISA in August. There are now 59 flexible ISA products in total.
Truly flexible products also facilitate Additional Permitted Subscriptions (APS) where, on top of the annual subscription limit, the surviving spouse of a deceased ISA holder can transfer in their late partner’s holding. This ensures that the savings built up can continue to benefit from the tax advantages of an ISA even when the original holder has passed away. However, 100 ISA managers accept APS, a little over 70%; and 82, just 60%, permit APS to be transferred in from another ISA manager.
Bed and ISA is a useful facility where the ISA can be funded with the client’s existing investments. The stocks and shares held in a dealing account (General investment Account) are sold and bought back in the ISA, the two deals executed at the same time to minimise the effects of market movements. However, of the 141 ISA managers listed in our research, only 44, less than a third, offer this functionality This is a pity because it is not uncommon for people who have used up their ISA allowance for one tax year to want to fund their ISA for the following year with existing investments.
Investment options
There are 92 platform-exclusive products from 45 providers giving access to open architecture funds numbering several thousand in most cases. The remainder typically give access to a more limited set of investment options – perhaps as many as 50 funds, but often no more than ten.
The most popular form of investment is Unit Trust/OEICs with over 60% of products giving access to a range of funds. A quarter of products give access to direct equity investments. Far fewer offer smoothed or structured funds and cash accounts.
Recent product changes
On balance there appears to have been a certain amount of contraction in the product market during the year with some providers like Way, Fundrock and abrdn removing some of their product options. Some old products such as those from Police Mutual and abrdn uk funds closed to new business. Other providers have merged their different ISAs into a single offering and there were some acquisitions with rebranding and/or mergers.
In February 2024, the MoneyFarm Stocks and Shares ISA was renamed to Managed ISA and MoneyFarm also launched the Share Investing ISA.
In October 2023, the T. Bailey Fund Services ISA and Junior ISA were rebranded to the Waystone Fund Services (UK) Limited ISA and Junior ISA following the acquisition and Waystone Management (UK) Limited acquired Link Fund Solutions, the LFS ISA and Junior ISA being rebranded under the Waystone name.
In November 2023, the Evestor ISA customers were transferred to Octopus Money.
In September 2023, the Aegon Asset Management ISA stopped accepting new business directly from investors, and, as of June 2023, the abrdn Investment Trusts ISA ceased to be open to new business, finally closing in December 2023.
And in June 2023, Red Rose Friendly Society stopped accepting new applications for the With-Profits ISA and JISA and launched ESG ISAs.
We have seen app-based providers slowly coming to market that offer ready-made solutions/portfolios based on themes such as climate, energy, tech, holding shares in companies that aim for these goals.
As is always the case, established providers who market their products through intermediaries periodically update their current ISA offerings in terms of investment types available, charges and premiums; whereas, the majority of launches and withdrawals are largely confined to the d2c ISA providers.
