As advisers draw breath after the frenetic activity associated with the end of the tax year, it is worth considering what lies in store for one of the UK’s most popular investment products. No doubt advisers will have worked hard to maximise their clients’ ISA allowances for 2025, and it is expected that the £725.9bn of assets reported to be held in ISAs will have received a further significant boost.
The ISA is a product that people generally understand, or think they understand at least, such that they feel confident to invest without taking financial advice and, consequently, ISAs will undoubtedly represent the main part of most people's savings strategy. Advisers, however, have an important role to play in helping clients navigate the nuances of the ISA rules, which will come into sharp focus as the government develops its plans for ISAs during the coming year.
In the Spring Statement, the Chancellor stated that, “The government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission. Alongside this, the government is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest.”
The government, it seems, wants more people to invest in equities rather than cash, and wants more people to be able to self-serve. So, while on the one hand the focus on equity over cash investments is good for the advice sector as, one would hope, more people seek financial advice for these riskier instruments, it is clear from the statement that the government wants consumer to be confident to invest of their own volition and the measures the FCA may put in place could be perceived as circumventing the need for advice.
Cash ISAs, it seems, are under threat and the prevailing opinion is that the annual allowance could be cut to just £4,000 per annum from the maximum £20,000 per annum currently available; consumers would then be forced to invest the remaining allowance in equities, which might not be suitable for them, or seek alternative investment vehicles, which might not be as tax effective. The opportunity remains for advisers to match investments to client risk profiles and make more appropriate recommendations.
According to HMRC, £71.6bn was subscribed to ISAs in the tax year 2022/3. Of that, over £41bn went into cash ISAs and just £28bn into stocks and shares ISAs; so, if nothing else, there will have to be a massive cultural shift even though it might be more suitable for some people to move into equities.
Defaqto’s Matrix database holds details of 596 different cash ISAs from almost 100 banks and building societies, and 269 different stocks and shares ISAs including junior ISAs and lifetime ISAs from 138 different ISA managers. One could imagine that the shift towards equities might result in fewer cash products and an influx of new stock and shares products, particular in the D2C space.
There are 152 stocks and shares ISAs from 81 managers designed for distribution through the advised channel, just 57%; again, we may see a shift towards D2C products at the expense of advised options if the government’s plans go ahead.
As it stands, though, advisers have plenty of options to choose from, and finding the most appropriate product for their clients should not currently be difficult; but what should advisers consider?
Minimum investments
The most common minimum investment for advised products is £1,000 or £50 per month where regular premiums are accepted, although providers which offer AIM/IHT ISAs tend to have higher minimum investments of £10k plus. Many Junior ISAs have only a nominal minimum investment, but advisers should be aware that a significant number require £1,000 and one even £2,500! Whilst clients employing a financial adviser are unlikely to be investing insignificant amounts, it remains true that the lower thresholds, particularly for Junior ISAs, brings the product within the means of more investors particularly for regular savings.
Charges
Almost no ISAs have an initial charge. Many ISA products are associated with an adviser platform, consequently, just 35 adviser products have a product annual charge, the remainder levying charges at the platform level and some relying purely on the fund charges on the underlying investments to pay for the product. It is important to take into account all the charges that a client will incur throughout the value chain to identify the true cost, particularly in the light of fair value requirements.
Where advisers have most to offer their clients is in helping them make the most appropriate investment choices and choosing products that are sufficiently flexible for their continuing needs.
Investment options
People coming to a financial adviser for ISA advice, doubtless will want guidance on the best funds in which to invest. Of the 152 products available to financial advisers, 58 are platform exclusive products with access to a largely unlimited number of funds through open architecture. The remaining 94 products offer access to a limited investment selection typically ranging between one and 50 funds, although there are some exceptions.
ISAs offer access to a range of investment types within the wrapper, as shown in the table below, but by far the most popular investment is Unit Trusts/OEICs with 80% of adviser ISA products offering access to any number of them, but a significant number of products are able to include direct equity investments too.
Percentage of adviser products offering each investment type
|
Unit Trusts/OEICs |
80% |
|
Ethical Funds |
67% |
|
ESG Funds |
67% |
|
Passive/Index Funds |
50% |
|
Equities AIM |
39% |
|
Investment Trusts |
38% |
|
ETFs Available |
38% |
|
Real Estate Investment Trusts |
36% |
|
Funds Non-UK |
35% |
|
Equities LSE |
35% |
|
Fixed Interest UK |
30% |
|
Equities Non-UK Index |
29% |
|
Cash Accounts Available |
26% |
|
Guarantee/Protected Funds |
22% |
|
With Profits/Smoothed Funds |
15% |
|
Structured Products or Structured Notes |
11% |
|
Exempt Property Unit Trusts |
7% |
|
Life Funds |
3% |
| Source: Defaqto Limited |
Flexible ISAs
Of the 81 managers that offer adviser products, only 34 of them offer Flexible ISAs. Flexible ISAs permit previously withdrawn money to be returned to the ISA within the same tax year without further contributing to the investor’s annual allowance. This means that people can have access to their money, on a temporary basis at least, without diminishing their ISA portfolio. There are just 37 such products for advisers to choose from.
Additional Permitted Subscriptions (APS)
When advising married clients, financial advisers will want to recommend products that allow APS because, when a spouse dies their ISA holding can then be transferred into the surviving spouse’s ISA on top of the annual subscription limit, thus ensuring that the savings built up remain tax efficient; however, not all managers accept APS and even fewer permit APS to be transferred in from another ISA manager.
Bed and ISA
ISAs offering a ‘Bed and ISA’ facility can be funded with a client’s existing investments. The stocks and shares held in a dealing account are sold and bought back in the ISA, the two deals executed at the same time to minimise the effects of market movements. However, of the 81 ISA managers that offer ISAs to financial advisers, only 36, less than half, offer this functionality. Again, this is the sort of service that someone employing a financial adviser might expect to receive.
These flexibility features are naturally pertinent for standard ISA recommendations, however, there are other ISA products at the professional adviser’s disposal to help clients achieve their investment goals.
Lifetime ISAs (LISA)
Lifetime ISAs were introduced in 2016 to help first-time buyers or people saving for retirement; and they have effectively replaced the Help-to-Buy ISA, which was finally withdrawn in 2019.
Holdings in a LISA are augmented with a bonus from the government equivalent to 25% of the subscriptions up to age 50 in addition to any interest received. Funds can be withdrawn from age 60 (to fund retirement) or at any time after the first year to purchase a home up to the value of £450,000. There are just 18 LISAs in the market from 17 providers but only four of them are available for distribution through advisers – those from AJ Bell, Investcentre, Brooks Macdonald, Fundment and Transact.
For clients not intending to touch their money until after age 60 or those saving for their first home, LISAs are a good option because of the additional bonus; however, care should be exercised because if withdrawals are made for any other purpose before age 60, a penalty of 25% of the amount withdrawn is incurred. Also the property threshold of £450,000 is relatively low in today’s housing market and savers will incur the 25% penalty on their withdrawal if their home is valued at a greater amount.
In January 2025, the government announced its intention to review LISAs. The product is popular with consumers, but may not be affordable by the government going forward. It is hoped that some of the more restrictive bonus rules will be relaxed and the property threshold increased, but we must be open to the possibility that the product could be scrapped altogether, in which case, clients have a limited time in which to buy the product in its current form.
Workplace ISA
For firms advising corporate clients, bringing workplace ISAs to their attention is a smart move. By offering their employees a workplace ISA through payroll, employers can encourage them to save in a tax efficient way and be seen to help them achieve their financial goals.
There are 16 workplace ISAs in the market from 14 providers, but again, fewer, just five, offer products through intermediaries: Aegon, Fidelity Personal Investing, Fundsmith LLP, Healthy Investment and Legal & General (PMS).
The key things to look out for when choosing a workplace ISA for corporate clients include not least the contributions arrangements. Some products facilitate collecting contributions through the payroll or an employee benefits platform via payroll, others only accept contributions direct from the employer or from the saver’s own account.
Workplace ISAs are typically simpler arrangements designed for regular savings and may not have the additional flexibility features mentioned above. However, Aegon offers a flexible ISA and Aegon and Fidelity facilitate Bed and ISA. All except Fidelity and Legal & General permit APS.
Innovative Finance ISA (Ifisa)
Finally, where advisers can add value through an ISA recommendation is with Innovative Finance ISAs. This specialised product typically holds peer-to-peer loans instead of cash or stocks and shares and, by its nature, is considerably more risky than regular investment funds. Peer-to-peer lending will not be right for everyone and since 2019, peer-to-peer platforms are not allowed to approach individuals direct unless they are classified as high-net worth or sophisticated investors.
However, the clients of financial advisers may well fall into this category and be looking to enhance their portfolio with some peer-to-peer lending sheltered in a tax-efficient wrapper.
ISAs remain a straightforward tax efficient product that are accessible by consumers without assistance, but the landscape is going to change in the near future and financial advice remains as important as ever.
Author: Ben heffer Defaqto Insight analyst