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An ISA way to invest in your future

17 April 2018

Why aren’t more people saving and investing via ISAs? And what can be done to encourage more people to use ISAs to prepare for their financial futures?

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

What you’ll learn:

  • Why people aren’t saving and investing via ISAs.
  • The effects of bias.
  • The importance of preparing for your future.

Why aren’t more people saving and investing via ISAs?

Many people still do not save via cash ISAs, let alone investment ISAs. ONS figures show that in the last tax year some 11.1 million adults opened an ISA – not bad, but less than one-quarter of the UK adult population. That said, let’s be clear that whilst many will likely gain, investing through an ISA doesn’t mean an automatic saving in tax for everyone; also, you need to be aware that the rules governing them can change in future and the effects of those rules on you will depend on your individual circumstances.

Part of this reluctance may be due to the fact that the word saving has two distinct meanings. When your supermarket till receipt tells you how much you saved in your weekly shop, it means you saved it only in the sense that you didn’t spend it. It is the benefits of savvy shopping. Research undertaken for Barclays Smart Investor shows we spent more than 3,580 hours of our lifetime hunting for bargains, and are on average around £25,000 better off for doing so. Clearly savvy shopping pays.

That is all fine. But saving also means setting aside that money for your future needs. And we don’t seem to be doing that very well at all. The same Barclays Smart Investor research shows 93 per cent of respondents claiming to know the advantages of investing, but only 10 per cent put their money to work through investments.

It helps if you consider banking as some behavioural scientists do - not necessarily in terms of money but also in terms of happiness. Modern banking can help you manage your lifestyle and happiness across different stages of your life. You can borrow your potential future income to buy the house or the car you need now; you can invest some of your current income so you can have a comfortable retirement.

Looking at it this way, ISA season should be presented in terms of investing for happiness rather than money. A little gratification deferred now; more happiness in the future.

The effects of bias

That is why behavioural scientists speak of present bias – saving is tough because we all prefer happiness now.

But that isn’t the only bias that affects investors at this time. Even if you are investing in stocks and shares ISAs, there may still be biases to your behaviour that you can amend.

There is familiarity bias. It leads us to invest in companies with which we are familiar - household names we might know as a customer as well as an investor. By investing in a retailer we know, we get feedback every time we visit. If they are having monthly sales, there may be stockrooms heaving with unsold goods. It’s a dangerous bias for new investors who could end up owning shares in a single company rather than diversifying.

Then there is home bias - that effect that encourages people to consider investing in companies or products that appear close to home. Here in the UK that might mean buying a FTSE 100 tracker rather than looking beyond our shores. Luckily this isn’t so dangerous since many UK blue-chip companies are international and may not conduct much trade at all in the UK. However, it does mean that investors’ minds may not be open to the opportunities a more global approach may bring.

The importance of preparing for your future

We can help overcome these biases by offering diversified ready-made investments and easy access to funds for investors. Investors should bear in mind though that investment, unlike saving in cash, carries a risk of losing money. Investments can fall in value no matter what strategy you adopt.

So in terms of lifestyle we should be encouraged to view ISAs as a means to future happiness. By strongly visualising the end goal we want to achieve – say, going on that retirement cruise or sending a child through education – we are far more likely to adopt a sensible investment approach, overcoming those biases to reduce risk and potentially enjoy long-term benefits for the future.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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