Individual Savings Accounts Market Assessment 2005

Key Note Publications Ltd, October 2005

Individual savings accounts (ISAs) were introduced in the UK in April 1999 and replaced both personal equity plans (PEPs — which were launched in 1987) and tax-exempt special savings accounts (TESSAs — introduced in 1991). ISAs are a tax-efficient scheme way of saving and investing, and were designed by the Government to encourage people to save money. ISAs are the Government's primary vehicle for tax-efficient saving outside pensions. According to the 2005 Budget, announced in March 2005, more than 16 million people — around one in three adults — now have an ISA and more than £160bn has been subscribed to ISAs since their launch.

Cash mini ISAs are available from banks and building societies, both on the high street and online. They are a very simple product, so have a wide appeal to investors who do not understand the stock market or who do not wish to take the risks associated with investing in stocks and shares. The sector is highly competitive, with most providers offering interest rates well above the base rate. Stocks and shares ISAs appeal to investors seeking capital as well as income growth. This sector is also highly competitive and investors can choose from a large range of providers and a wide selection of investments.

In terms of volume, sales of ISAs have remained relatively steady over the 5 years from 2001 to 2005, but there was a clear decline in the popularity of stocks and shares ISAs, and a sharp rise in the volume of cash ISAs. Cash on deposit is the largest sector of the market, accounting for 62.8% of all ISA funds as at 5th April 2004. Investors have increasingly chosen to keep their savings in cash ISAs as a result of the volatility of global equities and, in particular, the sharp reverses in equities seen in the early part of the decade. Although cash ISAs offer limited scope for capital growth, investors know that their initial investment will remain safe. By contrast, anyone investing in a UK equity ISA in 1999 could have seen the value of their investment fall by around 50% in the following 4 years.

ISAs are distributed through a wide variety of financial institutions, and the market is highly competitive. Building societies and the major high-street banks account for the bulk of cash ISAs, while fund managers represent the overwhelming majority of stocks and shares ISAs. The Internet is having a large indirect impact on the distribution of ISAs; not only is it easy for consumers to apply for and administer their ISA investments online, it is also a very useful research tool. Investors can now easily and quickly check which providers are offering the best rates on cash ISAs.

Furthermore, the Internet is a particularly useful tool for stocks and shares investors. Previously, anyone wanting to research the performance of investment funds, such as unit and investment trusts, before choosing an ISA, would have had to scour investment magazines or rely entirely on the word of their financial adviser. However, with the Internet, potential investors can easily research the performance of funds.

We forecast that the market for ISAs will continue to grow robustly over the next 5 years. In fact, total funds in ISAs are likely to almost double in value over the 5-year period between 2005 and 2009 (as at 5th April). Growth in demand for cash ISAs is likely to correlate with the interest-rate cycle and the performance of global stock markets. As any investor will testify, nothing is certain in economics and economic forecasting is a notoriously hazardous activity. However, we, along with most other analysts, believe that interest rates reached their peak at 4.75% in the current interest-rate cycle — the Bank of England cut rates by a quarter of a point to 4.5% in August 2005 — and that they will decline further in the remainder of 2005 and the first half of 2006. Following this, they are likely to begin rising again in the remainder of 2006, signalling the start of the next interest-rate cycle. The performance of the stock market over the next 5 years is even more difficult to predict, but our forecasts for the ISAs market are based on the view that the bull run that began in March 2003 will continue in 2006, and that shares will continue to find support in the remainder of the forecast period, rising by around 5% to 8% a year.

Executive Summary

1. Introduction

BACKGROUND

DEFINITION
Mini ISA
Maxi ISA
TESSA-Only ISA

2. Strategic Overview

MARKET DYNAMICS AND SEGMENTATION
Market Sectors
Cash ISAs
Table 1: Interest Rates Available on Selected Variable Rate, No Notice Required Cash ISAs (provider interest AER), August 2005
Table 2: Interest Rates Available on Selected Variable Rate, No Notice Required Savings Accounts (provider interest AER), August 2005
Stocks and Shares ISAs
Unit Trusts
Investment Trusts
Open-Ended Investment Companies
Self-Select ISAs
The Current Status of the Market
Overall Sales
Table 3: Sales of ISAs in the UK by Volume (000), Financial Years Ending 2001-2005
Figure 1: Sales of ISAs in the UK by Volume (000), Financial Years Ending 2001-2005
Cash ISAs
Table 4: Movements in Interest Rates in the UK (%), 2000-2005
Stocks and Shares ISAs
Table 5: UK Equity Turnover and FTSE 100 Index (£bn and index), 2000-2004
Table 6: Sales of Gilts (£bn), 2000/2001-2004/2005
Figure 2: Sales of Gilts (£bn), 2000/2001-2004/2005
Table 7: Net Sales of Equity ISAs† (£m), 2000-2004
Figure 3: Net Sales of Equity ISAs† (£m), 2000-2004
Life Insurance
Total Industry Value and Growth
Table 8: Market Value of Funds in the UK by Type of Qualifying Investment (£m and %), as at 5th April 2000-2004
Figure 4: Market Value of Funds in the UK by Type of Qualifying Investment (%), as at 5th April 2004

DISTRIBUTION
Depolarisation

COMPETITIVE STRUCTURE
Cash ISAs
Stocks and Shares ISAs

ADVERTISING

THE CONSUMER
Who is the Consumer?
Factors Affecting the Consumer
The Economy
Gross Domestic Product
Table 9: UK Gross Domestic Product at Current and Annual Prices (£m), 2000-2004
Unemployment
Table 10: Actual Number of Unemployed Persons (million), 2000-2004
Household Disposable Income
Table 11: Household Disposable Income Per Capita (£), 2000-2004
Inflation
Table 12: UK Rate of Inflation (%), 2000-2004
Household Savings Ratio and Consumer Confidence
Table 13: Household Savings Ratio† (%), 2000-2004
Table 14: The Average Amounts Adults Are Confident Spending to Purchase Expensive Items (£ and %), November 2004, February 2005, May 2005 and August 2005
Pensions Crisis
The Property Market
Table 15: Mortgage Equity Withdrawal (£m and %), 2000-2004, and Quarter 1 and 2 2005
The Reputation of the City
MARKET FORECASTS

3. Cash ISAs

BACKGROUND

MARKET SIZE
Table 16: Market Value of Cash ISAs in the UK by Type of Qualifying Investment (£m and %), as at 5th April 2000-2004
Figure 5: Market Value of Cash ISAs in the UK by Type of Qualifying Investment (£m), as at 5th April 2000-2004

CONSUMER TRENDS
Table 17: Most Important Reason for Choosing a Bank/Building Society (% of respondents), 2004

MARKETING ACTIVITY

ADVERTISING
Main Media Advertising Expenditure
Table 18: Main Media Advertising Expenditure on Mini Cash ISAs (£000), Years Ending June 2004 and 2005

DISTRIBUTION
Table 19: The UK Branch Network of the Major British Banking Groups (number of branches), 1999-2003
Table 20: Number of Branches Operated by Building Societies in the UK (number and 000), 1999-2003

4. Stocks and Shares ISAs

BACKGROUND

MARKET SIZE
Table 21: Market Value of Stocks and Shares ISAs in the UK by Type of Qualifying Investment (£m and %), as at 5th April 2000-2004
Figure 6: Market Value of Stocks and Shares ISAs in the UK by Type of Qualifying Investment (£m), as at 5th April 2000-2004

CONSUMER TRENDS
Table 22: Consumers Who Are Considering Taking Out an ISA in the Coming Year Via a Fund Manager or Funds Supermarket (% of respondents), 2005

MARKETING ACTIVITY

ADVERTISING
Main Media Advertising Expenditure
Table 23: Main Media Advertising Expenditure on Stocks and Shares ISAs (£000), Years Ending June 2004 and 2005

DISTRIBUTION
Table 24: UK Funds Under Management by Company Listing by ISA Funds Ranking (£), August 2005

5. Self-Select ISAs

BACKGROUND

MARKET SIZE
Table 25: UK Users of Independent Services on the Internet by Volume (million users and %), 2000-2004
Figure 7: UK Users of Independent Investment on the Internet by Volume (million users), 2000-2004

CONSUMER TRENDS
Table 26: Penetration of Consumers Who Use the Internet for Savings and Investments (% of respondents who use the Internet for managing all or some of their finances), 2005

MARKETING ACTIVITY

ADVERTISING
Main Media Advertising Expenditure
Table 27: Main Media Advertising Expenditure on Stockbroking/Share Dealing Online (£000), Years Ending June 2004 and 2005

DISTRIBUTION

6. An International Perspective

THE GLOBAL MARKET
The US
401 (k)
Individual Retirement Arrangement
Health Savings Accounts
Savings Bonds
Europe
Compulsory Savings

COMPETITOR ENVIRONMENT

7. PEST Analysis

POLITICAL FACTORs
ECONOMIC FACTORS
SOCIAL FACTORS
Table 28: Number of Individuals Subscribing to Cash and Stocks and Shares ISAs by Income and Subscription Amount (£), 2001-2002
TECHNOLOGICAL FACTORS

8. Consumer Dynamics

INTRODUCTION

BY PRODUCT TYPE
Table 29: ISA Options Consumers Are Most Likely to Choose by Product Type (% of respondents), 2005

BY DISTRIBUTION CHANNEL
Table 30: ISA Options Consumers Are Most Likely to Choose by Distribution Channel (% of respondents), 2005

MOST IMPORTANT FACTORS
Table 31: Factors Consumers Take into Account When Deciding Who to Open an ISA With (% of respondents), 2005

THOSE NOT PLANNING TO TAKE OUT AN ISA
Table 32: Consumers Who Are Not Considering Opening an ISA in the Coming Year (% of respondents), 2005

9. Company Profiles

INTRODUCTION

ABBEY
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

BARCLAYS PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

THE CO-OPERATIVE BANK PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

FIDELITY INTERNATIONAL
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

HBOS PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

HSBC HOLDINGS PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

INVESCO PERPETUAL
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Future Company Developments

Legal & General (Unit TRust Managers) Ltd
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

LLOYDS TSB Group PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Appointments
Advertising
Profitability
Future Company Developments

NATIONWIDE BUILDING SOCIETY
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

NEW STAR ASSET MANAGEMENT LTD
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

PRUDENTIAL PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

The ROYAL BANK OF SCOTLAND PLC
Corporate Strategy
Strengths and Weaknesses
New Product Development
Brand Development
Innovations
Research
Appointments
Advertising
Profitability
Future Company Developments

10. The Future

THE ECONOMY
Gross Domestic Product
Table 33: Forecast UK Growth in Gross Domestic Product in Real Terms (%), 2005-2009
Inflation
Table 34: Forecast UK Rate of Inflation (%), 2005-2009
Unemployment
Table 35: Forecast Actual Number of Unemployed Persons (million), 2005-2009

FORECASTS
Table 36: The Forecast Market Value of Funds in the UK by Type of Qualifying Investment (£m and %), as at 5th April 2005-2009
Figure 8: The Forecast Market Value of Funds in the UK by Type of Qualifying Investment (£m), as at 5th April 2005-2009
DEMOGRAPHICS
Table 37: Projected UK Population by Age (000), 2002, 2006 and 2011

MERGERS AND ACQUISTIONS

11. Consumer Confidence

METHODOLOGY

THE WILLINGNESS TO BORROW
Table A: The Average Amount Consumers Are Willing to Borrow in Order to Purchase Expensive Items at Current and Constant November 2004 Prices (£ and £bn), November 2004, February 2005, May 2005 and August 2005
The Desire to Borrow is Waning
Table B: The Number of Adults Willing to Borrow in Order to Purchase Expensive Items (000 and %), November 2004, February 2005, May 2005 and August 2005

THE WILLINGNESS TO SPEND FROM SAVINGS
Table C: The Average Amount Consumers Are Willing to Spend from Savings in Order to Purchase Expensive Items at Current and Constant November 2004 Prices (£ and £bn), November 2004, February 2005, May 2005 and August 2005
Confidence is Fragile
Table D: The Average Amounts Adults Are Confident Spending to Purchase Expensive Items (£ and %), November 2004, February 2005, May 2005 and August 2005
The Extremes Contract

12. Further Sources

Associations
General Sources
Government Publications
Other Sources
Bonnier Information Sources

- Abbey
- Barclays Plc
- The Co-Operative Bank Plc
- Fidelity International
- HBOS Plc
- HSBC Holdings Plc
- Invesco Perpetual
- Legal & General (Unit Trust Managers) Ltd
- Lloyds TSB Group Plc
- Nationwide Building Society
- New Star Asset Management Ltd
- Prudential Plc
- The Royal Bank of Scotland Plc

Customers who bought this item also bought

• Facilities Management - Global Strategic Business Report
• The Offshore Trustees' UK Tax Handbook
• UK Recruitment Consultants Market Research Report
• Pollution at Sea: Law and Liability
• Business Services: United Kingdom Industry Guide 2010
• The British Exporters CD-ROM 2013
• UK Consumer Debt Purchase: Market insight report
• Business Services: United Kingdom Industry Guide
• The UK B2B Information Market
• IT Recruitment Market Assessment 2010