Juicy Worm ISA Business Model - Who Falls for It ?

Spivved1987

I am in the hassle time of shifting previous years' ISAs so I don't end up with 0.5% gross or less. I assume many, many people will be doing the same. Given the work this entails for both us and the providers, does it really make sense for this business model to be so prevalent? I suppose it must, but it does seem incredible that people can leave money in cash ISAs paying such pitiful rates. Has anybody done any research to see the 'churn' rates of ISAs ? In a way, I suppose we have to be grateful for people who do not actively manage their ISAs as it leaves more 'worm' for those of us who do, but in reality the whole thing is very unsatisfactory.

Derivative

I think the question you have to ask yourself is, how educated is the British population.

It's not just about ISA's, look at retail for example. People line up to buy products marked up 400% with a shiny name. Money lost on that dwarfs the £150pa interest on £5k. I would say that people rolling over ISA's and building a pot is probably reserved for a small proportion of people.

jimjames

At least with share based ISAs you don't have this problem and can choose a product safe in the knowledge that the provider won't deliberately shaft you in 12 months time.

FLAPJACK

Hi,

My wife and I have both have S&S ISA's, we started them 2 years ago.....seems to me that they haven't really increased much in that time, compared to an Investment Bond we opened at the same time with the same company (Axa).
I am thinking of scrapping the S&S ISA's and put the money into the Bond instead as it has outstripped what the ISA's have produced in the same time. Even though both products are based on the stockmarket.....advise anyone? cheers

dunstonh

My wife and I have both have S&S ISA's, we started them 2 years ago.....seems to me that they haven't really increased much in that time, compared to an Investment Bond we opened at the same time with the same company (Axa).

S&S ISAs and investment bonds are just tax wrappers. If you put the same fund in both then the ISA should beat the investment bond in all but a short period in a falling market (as tax earmarked for payment is not required and is reinvested back within the fund).

So, had the fund in the AXA bond been in the ISA it would have done better. It has nothing to do with the wrapper but the investment within the wrapper.

I am thinking of scrapping the S&S ISA's and put the money into the Bond instead as it has outstripped what the ISA's have produced in the same time. Even though both products are based on the stockmarket.....advise anyone? cheers

No no no. You should be thinking of doing the opposite. ISA trumps investment bond in the tax wrapper pecking order.

jimjames

FLAPJACK wrote: »

Hi,

My wife and I have both have S&S ISA's, we started them 2 years ago.....seems to me that they haven't really increased much in that time, compared to an Investment Bond we opened at the same time with the same company (Axa).
I am thinking of scrapping the S&S ISA's and put the money into the Bond instead as it has outstripped what the ISA's have produced in the same time. Even though both products are based on the stockmarket.....advise anyone? cheers

What funds were the ISAs invested in? To not make any money in the last 2 years is quite an impressive feat for any fund manager when the UK index has increased nearly 100%.

FLAPJACK

Hi Dunstonh,

Thanks for the input.

Thinking about it,I suppose the IB has grown more because there was a larger sum originally invested £22800 at the outset.... (obvious now!!). I understand what you say regarding the S&S ISA being protected somewhat from a falling market.

Taking that on board maybe I should think of leaving things as they are at the moment.

I would add to the ISA's using money from the IB, however that will cost me fees, thereby outstripping any potential short term gain.
But I could add to the S&S ISA's during the coming year.

FLAPJACK

Hi Jimjames,

They have made money but not as much as the Investment Bond....however of course there isn't as much invested in the S&S's ISA as in the Bond.

dunstonh

I would add to the ISA's using money from the IB, however that will cost me fees, thereby outstripping any potential short term gain.

It shouldnt do. Although that may depend on where you are buying from. Its just a variation of bed&ISA by taking no more than 5% a year out of the bond (unless you dont need to be within the deferral limits) and putting it in the ISA. If you are being charged for doing that then you should look at your providers/advisers again for one that doesnt do it.

FLAPJACK

I'm seeing the FA next week who sold me the ISA and Bond so I will see what the situation is regarding taking some from the IB and into the ISA, I mentioned charges as each month I look up the value of the bond and it says if I wish to cash it in then it will cost over 2k....obviously this is because the bond has only been running for 2 years and I understand it's a logterm product (OEIC). So I'll see if transferring some to their S&S ISA attracts these charges or not.

Thanks for the info.

dunstonh

The investment bond will have an annual free allowance you can withdraw without penalty. Typically its around 5-7.5% p.a. in the first 5 years. After year 5 you can do what you like. at year 2 you would suffer something like a 7% penalty if you draw more than the free annual allowance. However, taking the free annual allowance and putting that into an ISA is tax efficient. If the adviser wants to charge you for that then you should consider another as that is just greedy (unless you are not paying for servicing and the charges are set for transactional with any servicing commission rebated).

That said, you mention its an OEIC. OEICs are not investment bonds (although some investment bonds can have OEICs in them). OEICs typically have no tie in and can be easily bed&ISA'd