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Compares Cash-ISAs/Savings-Accounts with Stocks-and-Shares-ISAs

From April 2017 we can put up to £20,000 per year into tax-free savings whether Cash-ISA or Stock-and-Shares-ISA or a combination of the two.
With median annual gross earnings around £31,500; the £20,000 limit is more than enough for the ordinary saver.

expand/collapse  ISA limits history table

Cash ISAs/Savings-Accounts

Cash-ISAs and savings-accounts are risk-free. Savings are protected up to £85,000 per provider by the Financial Services Compensation Scheme.

Since 2010 savings have been eroded slightly by inflation.
£10,000 in a savings account returning 2.0% less than inflation loses £200.00 per year in purchasing value.

Please make End-Year five or more years greater than Start-Year

With the personal savings allowance introduced in April 2016, savings interest from regular savings accounts is paid gross and basic-rate taxpayers can receive interest of up to £1,000 per year tax-free. £1,000 would be £50,000 at 2.0%.
So Cash-ISAs are no longer the only tax-free option.

Stocks and Shares ISAs

Stocks-and-Shares-ISAs are NOT risk-free.
FTSE-100 was 6930 at end-December 1999, and had fallen to 3287 in mid-March 2003.
It was about 6730 on mid-June and mid-October 2007 and had fallen to 3512 early-March 2009.
It rose to around 7770 during the first 6 months of 2018 and fell to 4993 in March 2020.

These huge variations make us cautious of equity-based savings, but ignoring equities removes the possibility of higher returns.

The theory is that low returns go with low risk, and higher returns with higher risks; and in the long-term equities will out-perform savings accounts.

Period 1990-1999 was exceptionally good for equities;
2000-2009 was bad for equities, we lost money in real-terms and we would have been better-off investing in Cash-ISAs;
period 2010-2019 was good for equities.
This is illustrated by the table showing outcomes for £5,000 invested at the start of the period.
As with all examples start and end dates matter, 2000-2009 included two stock-market crashes.

1990-199910 years£6,803£9,800£18,762
2000-200910 years£6,069£7,727£5,457
2010-201910 years£6,169£5,963£10,355


ISAs based on Index-Tracker funds

ISAs based on index-tracker funds should have no initial charge (up to 5% for other funds) and annual charges which are lower (0.05% - 0.5%) than those for actively-managed funds (0.5% - 1.6%).
Research from the US says trackers overall, on-average, out-perform actively-managed funds.

Keep your expectations realistic:
FTSE All-share index funds averaged 3.4% annual growth over the 19 years 2000-2018, which is 1.9% in real terms.
They averaged 7.3% annual growth over the 16 years 2003-2018, which is 6.3% in real terms.
The difference: FTSE funds suffered falls in the years 2000-2002.

Invest in funds tracking the broadest indexes.
Invest for the long-term. Remain a passive investor, do not keep chopping and changing funds incurring fees as you go.

expand/collapse  Warren Buffett on advantages of Index-Trackers

expand/collapse  Growth of Passive Funds

expand/collapse  Fund Platform Charges

expand/collapse  Searching for Suitable Index-Tracker Funds

Comparison of Geographically-based Index-Tracker Funds

The chart shows returns from £5,000 invested at start-year in various index-tracker funds.
As with all such comparisons start-year can change rankings.


Standard and Poor Total Market IndexVanguard U.S. Equity Index Fund GBP

FTSE Developed World ex U.K. IndexVanguard FTSE Dev World ex UK Equity Index Acc

FTSE Japan IndexHSBC Japan Index Fund Accumulation C

FTSE World Asia Pacific ex Japan IndexHSBC Pacific Index Fund Accumulation

FTSE Developed Europe ex UK IndexHSBC European Index Fund Accumulation C

FTSE All-Share IndexVanguard FTSE U.K. All Share Index Unit Trust GBP Acc

Other funds tracking the same index should have similar returns.

Defined Contribution Pensions

We now own our own pensions. George Osborne's 2014 budget removed many restrictions on pension-pot withdrawls for people retiring after April 2015.
A year after the reform, most large fund providers were offering a direct-to-consumer flexible-access drawdown product. Whereas before the reform investors with less than £100,000 were not considered suitable for drawdown and had to buy an annuity.
”In spite of the fact that Pension Freedoms were introduced recklessly fast a few years ago, it is becoming increasingly clear that not only is it extremely popular with investors, it is also working better than many had dared to hope.
The impact has been transformative. It has shaped attention to pension savings and retirement in a positive way.
Tom McPhail, head of retirement policy at Hargreaves Lansdown reported in Financial Times 28 June 2018.
Drawdown keeps the pension fund invested while providing an income. You can control the rate by which you consume the pension fund.
You can chose how your fund is invested: equities or bonds or a combination. This contrasts with annuities where the pension provider is limited to long-term bond yields.
Should you die before the fund is used up, the remaining pension pot can be passed on tax efficiently to beneficiaries.

Pension contributions are free of tax but not national-insurance.
A 25% tax-free lump-sum can be taken when the pension is cashed-in: whether drawdown or annuity.
Tax advantages make pensions the most attractive savings option, better than ISAs.
Employer contributions increase the attraction.
All this assumes you are not a nurse, teacher, etc with a defined benefit pension.

Generally you must transfer your pension pot to a company that provides drawdown when you retire.
Annual drawdown administration charges are charged on the whole pension pot.

There are various drawdown calculators on the web; this example is derived from 'My Retirement Planner' on the Aviva website.
For someone retiring in 2018 at age 65, a pension fund of £180,000 would provide a 25% tax-free allowance £45,000 and a drawdown gross income of about £8,700pa for 17 years before the remaining £135,000 is used up.
This compares with the 2018 state pension of £8,546pa. Benefits of drawdown include continuing returns from invested funds and the feeling of personal control.

Early in a working lifetime money locked in a pension may be seen as too inflexible.
Pay the tax and buy an ISA is then an alternative.

Lifetime ISA

If you already receive maximum employer pension contribution and you are under 40, George Osborne's 2016 budget announcing Lifetime ISA's is of interest.
From April 2017, people 18-to-40 can start an ISA account, investing up to £4,000/year and receiving 25% from government, max £1,000/year, at the end-of-each tax-year. 25% rebate continues up to age 50.

House/Apartment as investment medium

Response from house price in real terms here

Last updated 06 March 2021.