ISAs face uncertain future

12th September 2007
By IB Staff Writer

The market for deposits and individual savings accounts (ISAs) remains strong in the UK. The deposits sector is expected to continue to grow over the next five years as providers become more adept at attracting new business opportunities by responding to and focusing more on customer needs, while a market correction is anticipated in the ISA industry, which could affect the development of ISAs.

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Deposits set to represent just over half of retail savings by 2011

At the end of 2006, the market for deposits products from banks and building societies in the UK had a value of GBP834.4 billion. This is forecast to grow significantly over the next five years and is expected to account for just over half of the retail savings and investments market in 2011, worth around GBP1.2 trillion.

In the deposits market, the product segments are diversifying, although ordinary savings accounts continue to dominate this sector. In response to growing competitive pressure, more of the top competitors are tying their products together. For example, savings accounts are being linked to current accounts or mortgages with current accounts in order to strengthen the client relationship.

Banks and building societies have caught on to customers keeping tabs on 'best buy' tables as well as chart-topping interest rates and are therefore becoming more competitive in pricing products. As a result, providers are increasingly adding 'catches' to accounts, such as requirements to open uncompetitive linked accounts or deposit a minimum amount every month.

Customer needs are being taken into consideration by banks and building societies as more accounts are instant access or no notice and more are available to be operated online or over the telephone. In both cases, these ongoing trends are focused on improving the convenience of banking for customers, and this appears to be set to continue.

ISAs are currently popular but face an uncertain future

The market for ISAs has grown significantly over the past five years and in 2006, new ISA sales were worth GBP33.3 billion, with a record 13,788 ISAs being taken out during the year. Mini cash ISAs, which are the most popular, have grown by 6.5% since 2002, in terms of annual sales value, although the average value of a mini cash ISA has not changed greatly. Between 2002 and 2006, the average value was GBP2,178.

Maxi ISAs are less popular, with 99% being in the form of stocks and shares. Overall development in the take-up of maxi ISAs has not been as good, with lower sales values and lower numbers of subscriptions in 2006 than in 2002.

Despite the current promise of the ISA market, over the next five years it will be hit by a stock market downturn, which will damage sales of the stocks and shares versions of the product. However, the cash form of ISAs should continue to do well and may even benefit from investors' reluctance to invest in stocks and shares, as the overall ISA market is forecast to grow by 4.6% to 2011.
'End Intelliext

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