Investment Isas hit fresh low

MORE money is flowing out investment Isas than being put in for the first time since their creation in April 1999. The net outflow of £23.5m in September followed the lowest recorded inflow of £25m in August.

The figures mark the latest stage in a long-term decline in the popularity of Isa funds, which invest in shares and bonds. At the peak, £2.3bn flowed into Isas in March 2000, the height of the technology stock market bubble.

The statistics, published by the Investment Management Association, will also add weight to industry claims that a change in the tax treatment of Isas has diminished their worth in investors‘ eyes. While Isa sales collapsed further, private investors remained keen on funds generally, piling £266m into funds outside Isas, compared to £68m a month before.

'Despite stronger markets in September, investor confidence remains low,' said Richard Saunders, chief executive of the IMA.

'The first net outflow that we have recorded from Isas shows that efforts to attract investors back to the market are not yet succeeding. The reasons are many and complex, but are likely to include continuing uncertainty about investment prospects, higher interest rates and the reduced tax benefits associated with Isas.'

The main reason for the long-term slump in sales is poor stock market performance. An investment of £1,000 in a typical UK-focused shares fund five years ago has shrunk to £990. People are increasingly opting to keep nest eggs in safer products, such as savings accounts or Premium Bonds, especially with interest rates climbing higher in recent months.

However, fund managers and financial advisers have also blamed the Treasury. In April, it scrapped a tax credit that boosted income from share-based Isa funds by 10%. Bonds funds wrapped in Isas still qualify for tax credits.

Plans to cut Isa limits have also been criticised. From April 2006, the cash mini Isa limit will fall from £3,000 to £1,000. The mini stocks and shares Isa will rise from £3,000 to £4,000 but the overall maxi Isa allowance will fall from £7,000 to £5,000.

Isas still avoid capital gains tax bills and funds wrapped in one sometimes carry lower charges than normal funds, especially if bought through a fund supermarket.

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