Individual Savings Accounts were launched 20 years ago, in April 1999. These tax-efficient savings and investment products were initially aimed at individuals, but in recent years they have started to gain traction in the corporate market, as part of a wider workplace savings proposition.
Isas were the brainchild of the then new Labour Government, and were designed to roll equity-based Peps (Personal Equity Plans) and cash-based Tessas (Tax-Exempt Special Savings Schemes) into one new product.
It was hoped this would encourage a population heavily reliant on shorter-term building society deposit accounts to build longer-term equity based savings instead.
Over the intervening years significant sums have flowed into Isas. Figures from HMRC show that at the end of the 2017/18 tax year there was £608bn invested in Isas. Around 44 per cent of these funds were in cash Isas, with the remaining 55 per cent in stocks and shares Isas. According to HMRC 22.1m adults now have some form of Isa savings.
The product itself has evolved over the past 20 years. Initially, there was just the option of a cash or stocks and shares Isa. But today there are a raft of products, including Lifetime Isas and Help to Buy Isas — both designed to help would-be first time buyers — as well as Isas targeting innovative finance and crowdfunding opportunities.
Many of these newer versions are now starting to become available through the workplace. Corporate Isas, where contributions are made via a payroll deduction, have been around for a decade, but to date the take up has remained relatively low, with muted demand from employers.
According to the latest Corporate Adviser Workplace Savings report, almost a third of consultants said the availability – or not – of a corporate Isa had no bearing on their client’s choice of workplace pension provider.
Six out of 10 advisers said a corporate Isa was a “nice to have” addition rather than being an essential part of a workplace pensions package.
But more providers are starting to offer a corporate Isa option, as pressure on pension allowances grows and well renumerated professionals seek alternative compensation solutions. There have been a number of newer entrants into this market – such as Smarterly, which recently teamed up with payroll lender Neyber.
Many expect that tech- based companies may be able to encourage greater take-up of Isas through more digital engagement and f inancial wellbeing programmes.
To date, Hargreaves Lansdown is the biggest player in this market by some margin, with some £333m in corporate Isa assets as at 30.6.18.
In comparison the larger insurance-based pension providers have a smaller share of the market. Standard Life, for example, had £118m in corporate Isas, Aegon had around £25m and Legal & General had just £4.7m.
Take up may have been slow initially, but there are signs that this is starting to change. This is being driven by a number of factors. Hargreaves Lansdown senior pensions analyst Nathan Long points out that one of the recent catalysts for change has been the introduction of a tapered annual allowance for higher earners on pension contributions.
He says: “This has limited what some higher earners can save into a pension, so there has been demand for other savings options.” t is noticeable that as this annual allowance for pensions has been reduced for higher earners, the Isa allowance has become more generous in recent years.
When Isas first launched the maximum contribution was just £7,000 per tax year. In recent years this has been extended to an annual allowance of £20,000, providing a useful top-up for those who have maximised pension contributions.
Aegon chief distribution officer, Ronnie Taylor says the provider has seen demand for Isas from employees, particularly those with arger defined benefit entitlements. “If they are nearing their lifetime or annual allowances they are choosing to direct their savings to alternative places, like Isas.”
But Isas aren’t just aimed at higher earners in the workplace. In recent years there has been an increased focus on financial wellbeing in the workplace, which has embraced those lower down the pay scale.
Long says: “Forward-thinking employers also realise that simply offering a pension will not satisfy the financial needs of the entire workforce. People have other savings needs, whether it’s trying to save a deposit to get on the housing ladder, savings for their children or putting ‘rainy day’ savings aside to cover them in an emergency.”
Corporate pensions, while highly tax efficient, are not necessarily ideal vehicles for these savings needs, so a suite of savings products, that includes options such as cash Isa, Lifetime Isa or Junior Isa may be more appropriate.
Taylor says: “We see workplace Isas as a complementary savings option to a pension. The pension is the core and often most valuable workplace benefit given there’s an employer contribution and tax relief on personal contributions.
“However a workplace Isa makes it possible for employees to save for medium to long term goals with any additional income they have.”
To be attractive to employees, convenience is key he says. Ideally Isa plans should be set up in the workplace at the same time as a pension, and employees should be able to see all their savings in one place via a workplace portal.
Isa products can also help build financial resilience. Recent research from the Money Advice Service showed that less than half of workers – 44 per cent – have saving of more than £500, and a quarter have no savings at all and regularly run out of money.
There is a body of evidence that shows that these financial difficulties are often a root cause of stress and anxiety, causing ill-health, absenteeism and lower productivity in the workplace.
Workplace savings propositions that incorporate both longer term savings such as pensions with shorter-term options like Isas can be a useful way to address this issue.
However one of the challenges facing employers is how these two elements dovetail together.
April’ s increase in AE contributions may mean some don’t have the surplus savings to make additional Isa contributions — although it could be argued that those with debts and very little in the way of savings should be prioritising shorter-term savings, or clearing debt, instead.
Nest is pioneering a new ‘sidecar’ initiative which aims to tackle this problem head on. Here, contributions are initially split between the pension and an emergency savings pot, to ensure savings get funded to a pre-set threshold.
If the employee accesses these emergency savings, then further contributions are again split between the two, until the savings cap is reached again.
Nest is trialling this new mode with Timpson, which will use the scheme with its 5,600 workforce. Long points out that this Nest initiative still remains a pilot, and he says it is likely to prove most successful with employers who have a large proportion of their staff on lower incomes and are looking to build cash savings.
He says there is potential for companies to offers stocks and shares Isas alongside pensions and cash options. To do this though, he says there needs to be a greater focus on financial education in the workplace.
“Employers that successfully operate workplace Isas tend to pair them with employee financial education. Investing in the stock market is generally poorly understood, so helping people understand the potential benefits of investing in shares rather than cash is crucial.
“To put this into context, a nationally representative survey of over 1,500 members of workplace pensions found that only 27 per cent thought their pension was invested in the stock market.”
He says that the market is likely to evolve by developing better ways of engaging employees with all aspects of savings and investing, and ensuring these products are easy to understand. “This will enable people to make more confident decisions about their finances,” he concludes.