When it comes to ISAs, people just don't seem to want the taxman's money.
I've just been looking over HM Revenue & Customs' ISA statistics, both historical and the latest figures for the year 2009-10.
And I'm struck by two things. Firstly, it's great to see some fantastic growth, both in the number of people subscribing to ISAs and the amounts being invested. But it's also disappointing to see that the numbers are still quite some way from the maximum potential benefit we could be enjoying.
It's also a little sad to see how few people of late have chosen to put their money into a shares ISA, missing out on the best performing long-term option there is.
Back at the start
ISAs were first introduced on April 6, 1999, replacing PEPs and TESSAs, and were intended to appeal to a wider range of people than those previous tax-exempt investment schemes -- people tended to think, for example, that investment in shares was only for middle class people and the seriously wealthy. Sadly, that's an attitude that's still with us, thought it's quite wrong. Anyone who is able to save just a few tens of pounds a month can invest.
Things were complicated a little back then by the existence of mini-ISAs and maxi-ISAs, but the total investment limit stood at £7,000. And how much of that total allowance was actually used up in that first year?
Of all of the eligible adults in the UK, there were only 9.3 million ISAs opened -- and with the options of having both cash and shares ISAs, the actual number of people subscribing was less.
And of the £7,000 maxi-ISA contribution limit, the average amount invested was just £4,600, with a total of £28 billion pounds invested in all kinds of ISAs. One thing that was encouraging was that £16 billion of the total went into shares, with just £12 billion in cash.
What about today?
Fast forward to the 2009-10 ISA year, the latest for which we have the figures, and we see very pleasing increases in the numbers. That year the allowances were a bit strange, starting the year at £7,200 -- barely upped since the very first year. But from October 6, people over 50 had their limit boosted to £10,200 (and since then, allowances have gone up with inflation, to reach this year's £10,680 limit).
And we saw a total of 15 million ISAs being opened during the year, attracting a total investment of some £45 billion, which is a very welcome increase -- though that's still way short of the maximum we could have invested.
And of that total, only £12.5 billion actually went into shares, considerably less than a decade previously, with the remaining £32.5 billion going into cash.
Sure, in 2009, people were about as keen on the stock market as a dose of plague. But in April 2009, the FTSE 100 was around the 4,000 level, and today it stands nearer 6,000 -- that's a rise of nearly 50%, and a huge opportunity missed by those who put their ISA allowances into cash.
Now, it's unrealistic to think that every eligible person in the country would actually have had several thousand pounds free to invest. But if we just consider working people, of which there would have been somewhere around 35 million, and guess at a weighted average allowance of £8,000, the total countrywide ISA allowance would have added up to £280 billion -- more than six times the amount actually invested.
Think people didn't actually have that much to invest? Well, according to a 2010 Halifax report (PDF) in 2009 the people of the UK had a total of £1,150 billion in deposit-based savings. OK, that wasn't all eligible for ISAs, as much of it would have been savings of people who had considerably more than their ISA allowance.
But with that amount in total savings, surely the cash that people could have put into ISAs was a good bit more than the £45 billion that actually went in -- and far fewer than half of the eligible population put anything at all into an ISA.
That's why HM Revenue & Customs can afford to allow us what is actually quite a generous tax-free investment limit -- because they know we'll only use a relatively tiny amount of it.
So what are the lessons from all of this? I think they're simple -- use up as much of your ISA allowance as you possibly can, and invest it for the long term in shares.
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The value of your investments and the income from them can go down as well as up. You may not get back the full amount you have invested. If you're in any doubt about the suitability of an ISA, or whether to buy or sell shares, you should consult an appropriate Financial Adviser. *Tax treatment depends on individual circumstances and tax laws are subject to change.