The Swedish Investment Savings Account,
a popular way of investing for households

One of the ambitions with the Capital Markets Union is to increase retail investor participation in the capital market and a potential way of achieving this is through tax related incentives. In Sweden, one such initiative was launched in 2012; the Investment Savings Account (Sw: Investeringssparkonto, ISK). Since its launch, the ISK account has become a highly popular way of saving among Swedish households. The savings placed in ISK accounts have grown to almost one third of GDP, almost half of the adult population now hold at least one ISK account, and the Swedish government has recently proposed to make placings up to 30,000 EUR completely tax free. On average since its launch, the tax rate has been 0.46%. So how does the ISK account work and would the result of launching similar accounts in other countries necessarily be the same as in Sweden?

When the ISK account was launched by the Swedish government, the declared aim was to encourage and facilitate household investments in the capital market. The way to achieve this purpose was twofold:

• Simplified taxation: with the setup of the ISK account, investing in the capital market became much simpler for households from a tax declaration perspective;

• Beneficial taxation: the ISK account was from the outset intended to be (somewhat) beneficial from a tax perspective as compared to other investment accounts.

The ISK account was preceded by several other initiatives in the form of tax incentives dating back to the 1970’s. These differed from one another, both in terms of taxation and in terms of what financial instruments they covered but they were all aimed at encouraging private individuals to invest in the capital market.

The tax level on the account is linked to the general interest rate level and the tax is applied on the total holdings with no tax on returns, dividends or transactions. Instead, only the holdings are reported to the tax agency and the banks providing the account typically handle this annual reporting rather than the individual itself. The holdings are measured quarterly based on market value, and the tax applies on the average market value of those four quarters. Further to the holdings, the tax also applies to deposits into the account in order to prevent deposits to, and withdrawals from, the account for tax planning reasons.

Given that taxes are applied to the total holdings and not returns, there is no netting of profits against losses and the tax applies even if there is a net loss. In this regard, the ISK account differs from the traditional investment accounts where you only pay tax (in Sweden 30%) on net profits and where you annually need to declare all e.g. dividends and transactions to calculate the net profit or loss.

In general, the ISK account is provided by credit institutions and securities companies and it is only available to private individuals. There is no limit on the amount that can be held on the account, and there is no limit on the number of accounts one can have. Almost 4 million Swedes now hold an ISK account and it is common for people to have more than one account.

Account holders are allowed to hold cash and basically all financial instruments listed on a regulated market or traded on a trading venue (regulated market or MTF). Hence, unlisted shares are not allowed on the account, nor is shorting shares. Furthermore, the Swedish state deposit guarantee applies, which means that the government will cover holdings up to 100,000 EUR should the account provider default.

As tax incentives have been identified also at EU level as a mean to increase retail participation in the capital market, the ISK account could serve as an inspiration. But to understand the effect of introducing the ISK account, it is also important to understand the Swedish financial ecosystem in which it was introduced:

• As mentioned above, the ISK account was preceded by several other similar initiatives. Since Swedish politicians were already acquainted with introducing tax incentivised accounts and households were acquainted with adopting them, the introduction became much easier;

• Retail participation in the capital market in Sweden is among the highest in the EU. This is partly thanks to the launch of the ISK account, but it was high before as well meaning that the barrier for adopting the ISK was much lower among Swedish households;

• Sweden ranks among the highest in the EU when it comes to financial literacy, which is known to lower the barrier for investing in the capital market, and this certainly facilitated retail participation when the ISK was launched. However high financial literacy also comes from high retail participation which in Sweden also comes from the setup of the pension system and the divestment of several state owned companies which were listed on the stock exchange and became “peoples shares”;

• Digitalisation and financial innovation is prominent in Sweden and has provided retail investors easy access to investing, both from their computers and on their mobile phones. The level of competition is also high, which has resulted in very low costs of investing for private individuals;

• Finally, there is a high level of trust in the market in general among the Swedish population which is positive for capital market participation.

Although the ISK account has been well received, there have been challenges both from a regulatory and practical point of view. Some of these were there from the start, while others occurred after the launch, due to legal or market conduct developments. There have also been challenges for the banks interpreting and applying the rules, due to a lack of clarity in some regards.

As the tax applied on the ISK account is related to the general interest rate level, which has been at historical lows more or less since the launch of the account, taxes on the holdings became lower than intended by the government. The taxation level rules have therefore been changed twice since launch, entailing an increased tax rate. While this is understandable from a government perspective, it has been negative for predictability regarding the terms. Another aspect of the tax being related to the general interest rate is that it is not necessarily beneficial from a tax perspective to keep lower yielding assets such as government bonds on the account.

Tax incentives can certainly be a good way of encouraging retail participation on the capital market. Since being launched, the ISK account has evidently become very popular among Swedish households. What has probably been most important for its success is the simplification of taxation although the beneficial tax level has certainly helped too. When looking at effects of the introduction of the ISK account in Sweden and drawing conclusions about the potential effects of introducing similar accounts elsewhere, one must also consider the local financial ecosystem in which the ISK account was, and is being, introduced as this could have a bearing on the potential outcome.