Budget puts Bed & ISA back on the agenda: 13% of clients will move investments from general investment accounts to ISAs or pensions, recognising the benefits of ‘Bed & ISA’ and ‘Bed & Pension’.
Steering the course
According to an initial pulse of Vanguard UK clients following last week’s Budget, only 4% intend to sell some of their investments as a result of the announcement, whereas more than one in three (37%) will remain fully invested, recognising the benefits of maintaining a long-term investment approach. Over half (56%) of responding clients will be impacted by changes to CGT, but 49% will not make changes to their portfolio as a result of the tax hike.
In fact, 25% of ISA holders plan to increase their contributions post-Budget and 73% will keep their contributions the same. While less SIPP holders (16%) will bolster their contributions, the vast majority (76%) will not waver from their plan, suggesting that clients will overlook tax changes in favour of long-term investment goals.
Retirement worries
However, clients in retirement are feeling the effects of the Budget to a greater degree, with one in five (19%) now feeling ‘not at all confident’ in their long-term investment plan post-Budget, compared with just 4% of those in employment. This is encouraging retirees to take action, with three in five in retirement (59%) planning to increase their ISA contributions following the Autumn Statement, indicating that clients understand the important role that tax-wrapped products will continue to play to reach long-term investment goals.
The role for Bed & ISA
More than a quarter (28%) of clients surveyed are considering investing more in tax efficient wrappers in response to CGT changes coming into force on 6th April 2025. Another one in five (22%) will make the most of their CGT allowance, and 13% will move investments from general investment accounts to ISAs or pensions, recognising the benefits of ‘Bed & ISA’ and ‘Bed & Pension’ post-budget.
Vanguard calculated the potential increase in returns that a higher-rate taxpayer could realise by using Bed & ISA every year, based on the new CGT rate of 24%.
To recap, the process of ‘Bed ISA’ or ‘Bed & Pension’ involves moving investments from a general investment account to a more tax-efficient ISA or pension (e.g. a SIPP). This is done by selling holdings in a general investment account and then buying back the same holdings within an ISA or pension. An investor will end up with the same portfolio as before, but with their investments housed in a more tax-efficient account.
In Vanguard’s hypothetical scenario, the investor starts off with both a general investment account and an ISA, valued at £100,000 each. They invest in a portfolio which returns 5% a year after costs and then sells the investments after 10 years, paying CGT due on the remaining general account balance. The chart below shows the difference it would make if they depleted their general investment account over five years (by moving £20,000 a year into their ISA) compared with doing nothing. By diligently making the most of Bed & ISA, the individual ends up with £15,304 more, despite holding the exact same investments.
Return on a £200,000 original investment over 10 years – using Bed and ISA vs taking no action
Notes: This hypothetical scenario is for illustrative purposes only and doesn’t represent a particular investment or its expected returns. The investor starts with £200,000 portfolio, split evenly between a general investment account and an ISA. The portfolio is made up of 75% shares and 25% bonds and returns 5% a year after fees. The calculations are based on a CGT rate of 24%. The investments are sold at the end of the final year.
Source: Vanguard calculations.
James Norton, Head of Retirement & Investments, Vanguard Europe, said: “We are encouraged to see clients remaining focused on the long-term and not making panicked decisions in the wake of the Budget. Our research demonstrates that clients see value in staying the course and understand the importance of using tax-wrapped solutions to put their money to work in aid of long-term goals.
“We recognise that last week’s Budget will affect clients to varying degrees and the tax changes may still feel daunting for some – especially those in retirement who’s well laid plans may now need a revisit. For us, this serves as a reminder for individuals to review their financial plans and ensure they are taking advantage of all available tax allowances in any given year. Bed and ISA is an effective tool that could be making investors that additional amount to reach long-term goals. This is one example of where paying attention to allowances can significantly deliver for investors.
“Irrespective of the changes announced in the Budget, we believe that investors remain well-served by Vanguard’s four principles for investing success: have clear and appropriate investment goals; invest in a balanced portfolio of shares and bonds; minimise costs; and maintain perspective and long-term discipline.”
