Has the Isa age been frozen out?

Has the Isa age been frozen out?

Back in early 2000, it seemed that every billboard was plastered with adverts promoting individual savings accounts (Isas). The Saturday newspapers groaned with inch-thick Isa supplements telling readers the tax-free pleasures (and in a few cases the pitfalls) of investing in these products.

The public, still in the glow of the dotcom boom, responded enthusiastically. In just one month, March 2000, an astonishing £2.3bn flowed into the coffers of the investment management groups, mostly from small savers. The next month saw another £1.8bn surge in. But today scarcely a word is heard about shares Isas, either from the fund groups or from the government which plugged them as a way to boost overall saving levels.

Official figures this week showed that Isa sales drooped to just £24.8m last month, and on some counts has gone negative, with more people cashing in than buying.

Nearly everyone who bought a shares Isa in early 2000 is still nursing hefty losses, particularly if they invested in a technology fund; they are still showing 50% falls.

Cash Isas are a different matter - they continue to be enormously successful, and are a no-brainer if you have up to £3,000 to put aside. Check our best buy tables on page 16 for the pick of the deals currently available.

But is there any point today in investing in a share Isa? Since April this year Isas have lost a 10% tax credit, and there is no longer any direct Isa income.....continued below

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tax advantage for basic rate payers - those on the higher rate will continue to gain, although less than before.

Simon Ellis, head of retail at AXA Investment Managers, says: "It is clear that the take-up of Isas has fallen way behind historic levels. Indeed, there is an accelerating trend of people withdrawing from the product.

"Our research shows no particular catalyst for this change, but in the absence of the income tax saving that was withdrawn this year, there is little incentive to save when the tax advantage is just avoidance of capital gains tax. Given the maximum investment in any one year is only £7,000, the risk of paying CGT looks very remote.

"The Isa in its watered-down form is becoming irrelevant. This is a real pity, since they were working for a broad swathe of the population."

But others argue it can still make sense to take out an Isa. Richard Meek of IFAs Punter Southall Financial Management says: "The reason that sales of Isas have dwindled has really nothing to do with the Isa structure, but the state of the stock markets.

"In people's minds Isas are synonymous with equities and so investors have been scared off by poor returns, past scandals such as tech fund promotions and overselling by IFAs in the past into the wrong sort of funds.

"In reality, lower risk asset classes are available within the Isa annual allowance - the whole fixed interest sector, for example. These funds provide a very attractive, tax-efficient income and do not suffer like equity funds on which the tax credit is no longer reclaimable.

"A bond Isa is still a very attractive option and worth keeping, even more so for the 40% taxpayer.

Fidelity managing director Richard Wastcoat says: "It's a myth to say that Isas are no longer worth it, especially for income funds. They have clearly lost momentum but they are not a bad investment."