When PEPs were first introduced in the late 1980s most advisers grasped the concept, but consumers certainly did not.
This was a very different time, when the concept of Unit Linked Investment was only just beginning to take off, post privatisation issues. I distinctly remember that clients were very reluctant to invest until the point that you explained to them that they could only have one PEP per year, at which point they couldn’t invest quick enough!
The limitation of supply is a very powerful sales tool, it has worked for years with Friendly Society Savings Plans (mostly very poor performing products) and latterly it has worked well with ISAs.
So, it is not surprising that the sales of ISAs have held up as long as they have, but with dividends now taxed and the recent CGT changes, advisers are duty bound to have a rethink as to whether or not Unit Linked ISAs are right for clients.
As far as I am concerned, ISAs are probably a “dead duck” for all but the highest level investors. For people with less than £200,000 invested in Unit Linked ISAs, the prospects of a) making more than their CGT allowance in a year coupled with b) en-cashing all of their investment so as to realise all of the gain in one year, are probably negligible.
Whilst we can argue all day long about marginal tax on dividends for higher rate tax payers, and the other minor issues which give ISAs a marginal edge, there is one big fact that everybody forgets to take into consideration and that is the fact that losses cannot be offset against gains for CGT purposes. This is a bigger issue than any of the plus points you can find to support ISAs.
Losses in Tech ISAs at the start of the century wouldn’t have been nearly so bad had they been able to be set off against other gains. It is no wonder that the government wants to encourage people to leave deposit based ISAs where the tax loss to the government is fixed and tangible, neither is it any surprise that you cannot transfer back from Unit Linked to Cash ISAs.
The sale of Unit Linked ISAs will probably decline further, indeed it should do, the greatest tax efficiency for small to medium size investors is now going to come from collectives, preferably platform based.
The only exclusive benefit of Unit Linked ISAs is still the fact that you can only have one per tax year, but then you can still collect a lot of “dead ducks” over the years!
Adrian Shandley is managing director at Premier Wealth
The views expressed in this blog are the individual's own.
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