Investors' growing fears over stock market volatility led to plummeting sales of individual savings accounts last month, with a net outflow of funds from the tax shelters for only the third time in their history.
A dramatic loss of confidence meant that, in aggregate, investors took £31.3m out of ISAs last month, the Investment Management Association said, compared with positive sales figures of £43.2m in September and £83.4m in October 2006.
"Net ISA sales moved into negative territory for the first time in a year, continuing the subdued trend of the last few months," said the IMA chief executive, Richard Saunders. The IMA figures reveal that last month was the worst October on record since ISAs replaced personal equity plans (PEPs) in 1997.
The last time ISAs recorded a negative sales figure was last November, but the outflow was just £3.1m, a tenth of the deficit last month.
Analysts said the retail investment market had been spooked by the sub-prime credit crisis, the collapse of Northern Rock and setbacks on equity and property markets. Anna Bowes, head of investments at the independent financial adviser AWD Chase de Vere, said: "The stock markets are jittery and some people have decided they are not prepared to take the risk – they do not want to see their money crash again."
"I hope people are not being more irrational than that – I fear that a great deal of this will be the irrational fear that because the stock market has dropped we had better get out, even though this is the worst time to sell."
Ben Yearsley, the head of investments at the independent financial adviser Hargreaves Lansdown, added: "You've had lots of people going into property, which has taken a turn for the worse, you've had very volatile markets, and you've had very good profits in the last four years."
During previously difficult trading periods on world stock markets, ISA investors have flocked into other asset classes. However, this time a collapse in confidence in sectors such as commercial property has heightened withdrawals from the plans. This sector has been particularly hard hit after new withdrawal restrictions placed on instit-utional investors.
Antony Cousins, investment manager at Savills Private Fin-ance, said many investors did not feel able to stick with their holdings, despite the advice of professionals. "Some markets may not perform brilliantly in the short term, but equity ownership is still a choice longer term."
Leading investment managers attacked the Government for failing to do more to promote ISAs as a vehicle for long-term savings.
Peter Hicks, head of IFA business for Fidelity, the UK's largest fund manager, said: "There was a real opportunity to invigorate ISA sales just when we need people to save and make them a permanent figure in the investment landscape."
"We have seen this before with PEPs and we are now seeing the same decline in prominence. It is a real shame that tax credits have been removed and investment limits have not kept pace so that they are fast becoming much less important."
Mr Hicks warned that the loss of confidence in ISAs in recent months had been so serious that there was a danger that the new year, traditionally the most important period for sales, in the run up to the April tax year-end, would be a damp squib, with investors continuing to spurn the plans.
UK equities still account for around a quarter of all new ISA investors, with 24 per cent of new money coming into the shelters doing so via UK All Companies funds last month. However, large sums have also been withdrawn from such funds – the most popular area of the market last month, taking into account both sales and withdrawals, was the Cautious Managed sector.
In addition to equities and property, investors were also increasingly wary of the corporate bond market – the global bonds suffered an outflow of almost £153m last month, more than any other sector.Reuse content