How big should your ISA be?

Individual savings accounts (ISAs) were first introduced by the government in 1999 as a way to incentivise people to save towards their financial futures.

The main benefit an ISA is its tax efficiency. Any income or capital growth is sheltered from income tax and capital gains tax (CGT). And that’s never been more valuable as CGT allowances have been slashed over the past two tax years and the rates were hiked in the Autumn Budget.

What are the different types of ISAs?

• Stock & Shares ISA – this type of ISA is an investment account where you can get access to the stock market by buying investments like shares, funds, and bonds.
• Cash ISA – is a form of savings account where interest is paid on the cash amount you have subscribed. This is similar to a regular savings account you might get with your bank, except you don’t have to pay any tax on the interest.
• Lifetime ISA – or (LISA) is designed to help people build a deposit to buy their first home or save for later life. You can put in up to £4,000 each tax year and the government will add a 25% bonus (up to £1,000) on top of what you save.
• Innovative Finance ISA – a type of account that offers people the opportunity to utilise a peer-to-peer lending network, which allows them to lend funds while earning tax-free interest.

How many people in the UK have ISAs?

In the 2022/23 tax year, 12.4 million UK adults subscribed to an ISA, with over £70 billion being heaped into these types of savings products. Overall, there are around 22.2 million people with active ISA accounts.

Cash ISAs were the most popular option for ISA contributors with more than 60% of subscribers. This continues the trend of previous tax years, highlighting that people in the UK feel more comfortable saving than investing. The number of cash ISA contributors was higher than usual in the 2022/23 tax year as interest rates were raised by the Bank of England to tackle rising inflation.

Despite Cash ISAs taking the lion’s share of ISA subscribers, the Stocks & Shares ISA boasts a higher overall market value.

There are three main reasons for this.

• Firstly, stock markets typically perform better than interest rates on cash over the long term, especially over the last decade so investors have been rewarded for taking additional risk. Of course, there are no guarantees history will continue to repeat itself in the future.
• Secondly, people who contribute to a Stocks and Shares ISA have a higher average subscription value amount for each tax year, compared to the Cash ISA cohort. Over time, this leads to a bigger overall savings pot.
• The third reason is compounding. Coined by Albert Einstein as the 8^th wonder of the world. The process by where investment returns, from growth or income, are reinvested to generate additional returns over time. It’s like a snowball being rolled down a hill. It starts off small with not much extra snow added, but the bigger it gets the more snow it gathers. The effect is unimpressive at first but can turn into something spectacular as the years progress.

How does your ISA compare to others?

They say comparison is the thief of joy, so it’s important to use this information wisely. Any long-term saving or investing plan should be based on your individual circumstances. But these figures can still act as a helpful guide.

Another key thing to note is around 60% of the UK population does not have an ISA at the moment, so there’s a lot of people which aren’t benefitting from the ISA tax breaks at all.

The average value of people’s ISA gets bigger as they get older. During your 20s and 30s, you tend to be more focused on buying a house, getting married, or starting a family so you typically have less disposable income to hand to build your ISA savings.

As you move into your 40s and 50s, you’re approaching your peak earning years, so you have a surplus of disposal income and your major life purchases are out of the way (unless you have a mid-life crisis). You could also inherit wealth from your parents or relatives allowing you to add a lump sum to your savings.

What is the average ISA pot by salary in the UK?

How much you earn can play a big factor in the size of your ISA pot. The average ISA value trends upwards significantly as earnings hit north of £50,000. There will be high degree of correlation between age and income bracket as you often earn more with age. Addtionally, as time passes, your ISA portfolio has had more time to benefit from compounding – like a fine wine, it gets better with time.

What is the average ISA pot by gender in the UK?

Turning our attention to the gender gap and there’s not a lot to split males and females. The overall average ISA value pot is a smidge higher for men. This is likely down to the gender pay gap, but also the fact women are typically more risk averse than men. In the 2021/22 tax year, 41% of male ISA subscribers opened a Stocks & Shares ISA compared to just 27% of female ISA subscribers.

However, there are more female ISA holders than male ISA holders showing that women are doing more to save for their financial futures.

What is the average ISA pot by region in the UK?

By location, the Southeast of the UK is top of the podium for the largest average ISA value, followed closely behind by London and the Southwest.

The figures don’t come as much of a surprise given these areas are among the wealthiest parts of the UK – according to figures from the Office of National Statistics (ONS). At the lower end, Northern Ireland, Wales and the Northeast are among those with the lowest average ISA value.

It’s not too late to start

Whether you are starting out on your savings journey or approaching your later years, it’s never too late to start. ISAs can be for life.

Adult ISAs can be opened from aged 18 onwards. If you’re looking to open a Lifetime ISA, you’ll need to be between the 18-39 years old. However, once the account is opened, you can continue putting money in up until your 50^th birthday. For the younger ones, the parent or legal guardian can open a Junior ISA and contribute up to £9,000 each year until aged 18. And not just parents: grandparents, aunts, uncles, cousins and friends of the family can all contribute too. In fact, this can be a great way of managing an inheritance tax liability.

Junior ISAs – the secret inheritance tax weapon

The tax year ends at midnight 5^th April so you haven’t got long to secure your ISA allowance for 2024/25. Any unused ISA allowance cannot be carried forward to future years.
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