ISA season 2023 - trends

There's no doubt that the current cost of living crisis and strains on the UK economy are forcing people to take a closer look at their spending and outgoings and revisit what they are able to save. The result is that some people are unable to fund and maximise their ISA allowances for this financial year. And with confidence dwindling in the markets more broadly, many clients are certainly a lot warier of investing and taking more risk. However, that being said, the majority of clients do fund their ISAs from capital over income and have been able to maximise their allowance. It is also important for my clients to remain focused on their long-term goals and to have a portfolio that is positioned to ride out the waves of volatility. With volatility comes opportunity.

I've not seen a downturn in people using their ISA allowance. Making use of an ISA is becoming even more important, given the incoming cuts to the Capital Gains Tax allowance. Rising interest rates also mean many people are more likely to incur a tax liability on their cash deposits held outside of an ISA. We aren't concerned with recommending particular investment funds or making changes to asset allocations in an attempt to time the market. The key is always to remember the long-term investment goal and ignore short-term fluctuations. For those too nervous of investment markets presently, I still recommend making use of your ISA allowance. Even if you just use a cash ISA for now, it can always be transferred across to an investment ISA at a later date, and crucially this won't count towards that year's annual ISA allowance.

Most of our clients are funding their ISA allowance from other capital already invested, so we've seen no impact on their ISA contributions from the rise in the cost of living. Some clients fund their ISA from their income, however, and a handful have adjusted their monthly contributions based on changes to their income/expenditure picture. The cost of living has risen, so unless net pay has risen at a faster pace, investors may have needed to reduce their monthly savings for the foreseeable future.

Our clients on the whole are making their annual ISA contributions as normal this year and most of them are making the full contribution. The cost of living has had an impact on family finances of course but people are still trying to save for their retirement in the most tax-efficient way possible. ISAs now are even more vital in tax planning as capital gains and dividend tax allowances are being slashed from next year. We have seen no change in client risk appetite despite weak markets last year. We use index funds and don't believe in timing markets and so don't play around with our asset weightings. Having said that, we are much more positive now on government bonds at 3.5%-4% yields than we have been for well over a decade and are very comfortable with our allocations in this asset class going forward.

I always get ISAs set up in April, so we get maximum tax-free benefits for clients. What I would say for the upcoming tax year is if you can continue to invest in stocks and shares, then make monthly contributions to help you feel better about it. It may be that you end up worse off than doing a one-off lump sum but we're not aiming for investing perfection here. If you cannot stomach the volatility, then use a Cash ISA for your 20k allowance. Better to use the allowance than not, even if there are better rates available from normal fixed savings bonds. When the world has calmed down, you can convert into stocks and shares and that won't interfere with your normal allowance. And lastly, any old cash ISAs should be transferred to a provider with competitive rates. There are no excuses for getting less than a 2% return.

Never has tax awareness been so important. While ISAs are undoubtedly a great way to grow savings tax efficiently, they do next to nothing to protect those savings from Inheritance Tax, which at 40% can be more devastating to life savings than ongoing income or capital gains tax. With record amounts of IHT being collected, the need for expert advice has never been so great. So yes, please consider using your allowance but perhaps also think about speaking to a professional to see if you are focused on the right taxes.

With some people having to pay tax on the interest they earn on cash savings for the first time in a long time due to higher interest rates, many are turning to ISAs for the tax-free returns they provide. Your ISA allowance is very much a case of 'use it or lose it each year' and so it remains important to take full advantage of your tax-efficient allowances. My clients are no more risk averse. They understand that investing is for the medium to long term and falls in markets are in fact an opportunity for the long-term investor who contributes regularly to their investments. Most of my clients have decades ahead of them so short-term fluctuations are of little importance. Holding your nerve and investing in the great companies of the world remains the best way of beating inflation and enjoying positive long-term returns.

Given the upcoming changes to taxation, in particular the reductions to the CGT allowance and the dividend allowance, ISAs have become even more valuable when structuring a client's investments. When you combine this with the fact that markets are some way down from where they were this time last year, we are finding that ISAs are still extremely popular. However, as we believe in an evidence-based approach to investing, we are seeing clients invest appropriately and strategically in line with their agreed risk profiles rather than take any tactical decisions on exactly where to put their money. We believe that the most reliable way to achieve optimal returns is to put a plan in place and then ride out the frequent, but historically always temporary, declines in the markets.

Using your ISA allowance, whether investment or cash, is becoming more and more important now that the CGT allowance is being drastically cut and cash rates are on the rise. The personal savings allowance doesn't protect a lot of savings these days.

The cost-of-living crisis has seen a reduction in some clients who save regularly into their ISAs reduce the amount they are paying in. Generally, this was not about increases in costs, but due to their company not paying as large bonuses or having high enough earnings to support them. For business owners, this has been due to having to pay increased wages to retain and attract staff. For many clients, there has been increased interest in funding ISAs and pensions due to the reductions in the Capital Gains Tax Allowances from next year. They are encashing directly held shares and from general Investment Accounts or selling buy-to-let properties to get the gain taxed whilst the exemption is still £12300. As ever, the best funds are globally diversified, low cost index funds with as high a proportion in equities as they can cope with.

We are still seeing strong demand from the families we look after, to use as much of their ISA allowances as possible before the end of the tax year. For those that like to contribute into their ISAs on a monthly basis, despite the cost of living crisis they are continuing with their monthly contributions. Some clients like to increase these each year to keep pace with inflation, but during the past year, understandably, it has been harder to do than in previous years.