As The ISA Turns 25, Stocks & Shares Investors Are Nearly Millionaires

These are the conclusions of a new Morningstar report marking the 25th anniversary of the launch of the ISA, which, from 1999 onwards, permitted UK savers to put money into a tax-advantageous savings "wrapper" that can be used to invest in cash, stocks and shares, funds, investment trusts, innovative companies, or exchange-traded funds (ETFs).

Cash ISAs Way Ahead

Of the two basic vehicles, cash ISAs are without doubt the more popular of the two, however, with their stocks & shares counterparts in second place.

For every stocks and shares ISA opened by a saver, getting on for twice as many cash ISAs are saved into. Overall, half the average annual subscription of £8,690 goes to stocks and shares products. Of these investors, only 15% of savers invest their full £20,000 allowance.

This is backed up by provisional government figures for the 2021/2022 tax year, which show the number of cash ISA subscriptions for that year at 7,139, with stocks and shares wrappers attracting just 3,934.

Regardless, ISA holders have, collectively, built up a colossal pile of wealth. By April 2022, government figures show the total market value of all adult ISAs as being £741.6 billion, with around 11.8 million adult ISA subscriptions in the 2021/22 tax year.

This is in part due to the growth of the ISA product suite. Savers now have access to Lifetime ISA for home ownership or retirement savings, an Innovative Finance ISA, and, just this month, the arrival of the British ISA – whose generous allowance compels investors to buy shares in UK-listed companies.

The range of options is now so broad that certain investment industry commentators are criticising the government for overcomplicating a product that was originally designed to be simple, and – in theory – should not require regulated financial advice to open.

It's not all bad, however. According to report author Andy Pettit, Morningstar’s director of policy research, the addition of a British ISA to the ISA product suite could help make the case for stocks and shares investing to people keener on cash products than equity ones.

"The UK ISA might actually serve as a positive step by incentivising more people to direct their ISA allowance toward stocks and shares," he says.

"While incremental additions and amendments to the ISA framework may not be implemented in the most elegant way, £5,000 is being added to the ISA allowance, providing further help for investors to build wealth."

When Were ISAs Launched and Why?

As the world geared up for a new millennium, 1999 brought the creation of the euro single market currency, the ill-fated Millennium Dome exhibit, a solar eclipse, and the Y2K bug into the popular consciousness.

In business Napster was "revolutionising" music, BAE Systems (BA.) was formed via a merger of British Aerospace and Marconi Electronic Systems, and, in the UK, the new minimum wage forced firms large and small to pay a minimum hourly rate.

Then came the individual savings account, or ISA.

Introduced by then-chancellor Gordon Brown on April 6 of that year, the ISA was initially designed to replace pre-existing Personal Equity Plans (PEPs). But not everyone was happy. One member of parliament declared the product a "colossal failure" months after launch.

Nobody is saying that now. Today, ISAs are firmly part of the popular consciousness – so much so that politicians know new products will immediately attract the attention of savers.

How Are ISAs Taxed?

ISAs were designed to be a tax-advantageous way of saving, and in theory this is absolutely the case. ISA owners pay neither income, dividend, nor capital gains tax on the proceeds – so gains made in either cash or stocks & shares ISAs are untouched by the taxman.

This is naturally provided the saver sticks to a series of allowances, which have become more complex with the addition of products to the overall suite of options.

The current ISA allowance remains £20,000; a sum that can be spread across different types of cash or stocks & shares ISA accounts.

However, certain products – like the Lifetime ISA and newly-launched British ISA – have different allowances. The Lifetime ISA is subject to a £4,000 allowance per tax year and is subject to a host of other rules around withdrawals and payments, while its patriotically-branded counterpart hands savers a £5,000 allowance if they invest in UK companies.

How Easy is it to Become an ISA Millionaire?

"ISA millionaire" status is the subject of many column inches in the personal finance press.

Indeed, it's proven a popular topic of discussion, not least because of flexibilities introduced elsewhere. In 2014, for instance, new rules were announced allowing people with private pension savings to invest and withdraw their money more flexibly.

As such, savers have been encouraged think more comprehensively about how they can maximise the potential of their personal financial portfolios, including their ISAs. Since then, this has become even more important with the onset of a period of inflation, in which price rises eat away at the value of our money.   

Nevertheless, for most savers, reaching the £1 million mark in an ISA pot alone will feel something of a pipe dream. Does achieving it via equity exposure mean savers need more help? At a point where there is a degree of fatigue on the part of the retirement savings industry in solving the so-called "advice gap", Pettit says "perseverance" is needed.

"Better-off investors who maxed out their ISA allowance into global equities, as represented by the Morningstar Global Index, could be sitting on close to a £1 million investment pool free from capital and income taxes, reflecting the potential of the ISA," he says.

"Regulatory perseverance to find practical solutions to getting more advice to more people plays a vital role in maximising the ISAs potential to best meet personal financial goals."