Cash ISAs set to dominate this year – but at what long-term cost?

The majority of active investors are either undecided or will not be investing in an Individual Savings Account (ISA) before 6 April 2008, according to research from New Star Investment Funds.

The research, carried out by NMG Research, surveyed 335 active investors across the UK. Of those surveyed, 62% said they would forfeit their ISA allowance this year whilst only 38% of investors said they were considering taking out an ISA before the tax year end.

Some 10% cited nervousness about markets and the general economy as the reason not to take out an ISA this year whilst 27% expressed other reasons and 25% remained undecided.

If those surveyed were to invest in an ISA this tax year, 44% would opt for a cash ISA, 11% would opt for a UK equity growth ISA and 8% would opt for a UK equity income ISA. Asia and emerging market funds – the strongest performing markets in recent years – would each account for just 4% of investors’ choices. Some 19% of investors said they did not know where they would invest if they were to take out an ISA this tax year.

Richard Wilson, marketing director, New Star, says: “The opportunity cost to investors over the long term from both a tax and investment perspective could be significant. The survey suggests that the majority of investors may be relinquishing the opportunity to protect up to £7,000 from the clutches of the taxman.

“Whilst 44% of investors would consider a cash ISA this year they should consider the fact that over the past 20 years cash has returned 308.5% compared to superior returns of 607.6%(,581.1% and 417.8%(5)from direct UK commercial property, UK equities and bonds respectively.

“Long-term investors need to ask themselves this – if they look back in twenty years time, will they regret a missed opportunity and past short-term pessimism?

“Above all else, this research highlights the need for investors to seek independent financial advice.”