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Individual Savings AccountsPublished by: Key Note Publications Ltd Published: Oct. 1, 2005 - 141 Pages Table of ContentsExecutive 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 AbstractIndividual 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.
Key Note forecasts 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, Key Note, along with most other analysts, believes 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 Key Note's 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.
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