Why ISA investing continues to have great appeal

Paul Fidell, Senior Business Development Manager – Investments at Prudential, looks at why ISA investing continues to have great appeal for many investors.

Although the overall subscription limit has not increased from its current level of £20,000, ISA investing continues to have great appeal for many investors.  Whether it is for a start-up contribution of £50 per month, or a transfer for a larger sum, there are still plenty of opportunities for investors to consider this coming ISA season.

According to the latest figures from HMRC published in August 2018, the market value of investments held in ISAs was £608bn at the end of the ISA year 2017/18.  This figure is split 44% in cash and 55% in stocks and shares, the balance being held in innovative finance.  Interestingly, the subscriptions in the year 2017/18 were again dominated by cash, with £39.8bn.  Stocks and shares ISA had subscriptions of £28.7bn, which itself was nearly a 29% increase on the previous year.  So, the amount held in cash ISAs, and the subscription rate, continues to surprise given the background of interest rates continuing at historically low levels.

So, are investors missing out?  Is there an argument that holding cash, with little or no return prospects in the short term, is a waste of a tax wrapper?  Without coming down on either side of that debate, let’s consider some of the investment opportunities that Prudential can offer.

Firstly, it should of course be pointed out that where someone invests is combination of answers to different questions:

  • Why are you investing?
  • How long are you investing for?
  • How much risk are you willing to take on?

Secondly, there will be some clear-cut reasons why a cash ISA is the way to go; for example, where the aim is to build up some emergency funds or perhaps where there is a short-term spending requirement coming in, say, 3 to 5 years.

But, for those with a longer-term investment horizon, and the ability and willingness to take on board some risk, there are many opportunities available and cash might not be the best thing for them.

Single contributions and ISA consolidation

Whilst it might be attractive to follow the latest trend and invest in that exciting looking new fund launch; the reality is that just like any other significant investment, the key is to get the asset allocation right first.  There are many headwinds and challenges in the global economy at present and, for those with a longer-term horizon and greater risk capacity, the best way to weather the potential storms is a well-diversified, risk-controlled solution.

Over the last 2 years, PruFund has been available through an ISA and has proved extremely popular with investors.  Here we have a current choice of 6 different versions; PruFund Growth and PruFund Cautious plus 4 risk managed funds, all actively managed by M&GPrudential Treasury & Investment Office (T&IO), includes the team formerly known as PPMG, who manage the Strategic Asset Allocation (SAA) and will select funds from our With-Profit Investment universe.  They also provide the robust governance and risk management processes that underpin all our funds.  All the versions benefit from our established PruFund smoothing process and are suitable for clients looking to invest for 5 to 10 years or more.

The PruFund range has recently undergone a slight refresh, with new names and objectives for the risk managed funds (PruFund Growth and PruFund Cautious remain unchanged).  The new names are shown below, and the funds now have an objective to meet volatility ceiling limits, which allow us to manage the fund risk profile over time and help to align it closer to your client’s risk assessments.

Old name New name
Risk Managed PruFund 0-30 Risk Managed PruFund 1
Risk Managed PruFund 10-40 Risk Managed PruFund 2
Risk Managed PruFund 20-55 Risk Managed PruFund 3
Risk Managed PruFund 40-80 Risk Managed PruFund 4

Regular contributions

For those just starting an ISA with a small investment, or those thinking more strategically and “drip feeding” their investment throughout the year, regular contributions can take the worry and emotion out of trying to time the market.  In this regard, the last few years, and 2018 in particular, have been something of a roller coaster ride for investors.

This is the so called “pound cost averaging” approach where there will be periods when you are buying funds when the price is up, and you buy less units, and periods when the price is down, and you buy more.  The idea is that the cheaper units then offer the potential for greater returns when the fund has risen in value.

In the pensions, or decumulation, world, where we have the opposite situation of someone taking regular withdrawals from their investment pot, there is a strong argument for the use of a smoothed fund to negate some of the risk of short-term volatility.  In the investment, or accumulation world, we might want to embrace this short-term volatility, so an unsmoothed fund makes sense.

At Prudential we have a couple of choices here and crucially both use the same approach to asset allocation as the PruFund range; with T&IO at the heart of things, managing the process using the same philosophy across all our multi asset funds.

The Risk Managed Passive and Active ranges offer 5 different risk levels and use a similar volatility ceiling objective to the Risk Managed PruFunds.  As with the PruFund range, all our funds follow a well-diversified, risk-controlled approach.

The Passive range is the lowest cost approach, with Ongoing Charge Figures (OCFs) of between 50 and 51bps per annum, when held within the Prudential ISA and including the costs of that tax wrapper.  These funds will invest at least 70% in passive investments and will give globally diversified exposure to equities, fixed interest, alternative assets and cash.

The Active range has OCFs of between 80 and 82bps per annum, again when held within the Prudential ISA.  These funds will invest at least 70% in active investments and will offer additional diversification by investing into commercial property alongside the equities, fixed interest, alternative assets and cash found in the Passive range.

One final point is that, unlike the PruFund range, both the Passive and Active ranges can be invested in directly as OEICs or through a wide variety of platform-based ISA wrappers.  This would have the effect of reducing the OCFs to between 25 and 26bps for the Passive range and to between 55 and 57bps for the Active range.

So, if you like our philosophy and the way in which T&IO manage your client’s money; we can now offer a comprehensive range of Smoothed, Active and Passive alternatives to suit a wide variety of different requirements.

Learn more about Prudential’s investment options.

Recommended

13

FCA letter addresses PI insurers’ concerns over higher FOS limit

The FCA has written to professional indemnity insurers to explain how high value compensation awards might look since the ombudsman increased the award limit to £350,000. The regulator says in the letter, dated 17 May, it thinks the information will “help address some of the issues or questions stakeholders have raise regarding the ombudsman service […]

Wedding cake spouses turning their backs to each other for emerging problems
1

Govt debacle means fewer people benefit from the marriage tax break

Fewer people than previously thought are making use of the marriage allowance, which lets couples where one partner is a basic rate taxpayer and the other is a non-taxpayer claim a tax break. This is due to a governments’ mistake in counting the claims. Statistics published by Treasury last year showed that three million couples […]

CMA to probe merger of OneSavings Bank and Charter Court

The Competition and Markets Authority is to investigate the proposed merger of OneSavings Bank and Charter Court Financial Services.  At this stage, the CMA is inviting comment on whether this tie-up would substantially reduce competition in the mortgage market.  Interested parties have until June 19 to submit comments or objections. These will then be assessed […]

1

Paul Armson: We need a better conversation on client goals

Many make the mistake of inviting themselves into the client’s future without earning the right to do so Have you ever asked a client what their goals are, only to be met with a deer-in-the-headlights look? That will be because the goals conversation is an awkward one. Yet I see so many financial planners starting […]

The What of Trusts: Gift Trusts(part 1)

Helen O’Hagan, Technical Manager at Prudential looks at the concept of trusts, starting with Gift trusts and why they can be confusing and complex for many advisers. W – why use a gift trust?H – how to set up a gift trustA – access for the settlor and beneficiariesT – taxation of the trust WHY […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com