The Government confirmed it is looking at options for ISA reform as part of its drive to boost retail investment and support economic growth.
The Treasury’s Spring Statement document said it is seeking to “get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment and support the growth mission.”
There had been mounting speculation ahead of the Chancellor’s Spring Statement that changes to the ISA regime could be announced. One of the changes touted was the reduction of the annual allowance from £20,000 to £4,000 in a bid to encourage more money into investments.
Michael Summersgill, chief executive of AJ Bell, said: “Some have argued that cash ISA allowances should be scaled back to effectively shove people towards investing. However, research conducted by AJ Bell focussed specifically on cash ISA savers suggests this will not be an optimal way to shift consumer behaviour, with only one in five saying they would migrate to investing in the UK stock market if the cash ISA allowance was reduced or abolished.”
Summersgill said that in addition, any restriction on the amount of cash held within ISAs would also run counter to Labour’s stated aim to simplify the ISA landscape.
He explained: “Rather than having a simple-to-understand £20,000 overall limit, people would have a limit within that limit and there would need to be complex restrictions on transfers from stocks and shares ISAs to cash ISAs to prevent people gaming the system.
“One of the reasons the British ISA was such a bad idea was that it would have added horrendous complexity to an already complicated ISA system. Having rightly ditched this daft proposal, Reeves would risk achieving a similar outcome.”
Summersgill said part of ISAs success since their introduction in 1999 has been their simplicity but interventions by successive governments have “chipped away” at this, with six different ISA versions currently available in the UK, with different limits and rules for each.
“Having a separate product for those saving in ‘cash’ and an entirely different one for those investing in ‘stocks and shares’ creates an unnecessary barrier, namely the necessity to open a new account to invest for the long term. Combining cash ISAs and stocks and shares ISAs into a single main ISA product would make it simpler for people to transition from the former to the latter, and in the process reduce the upfront choice complexity which we know puts people off,” he added.
Rachael Griffin, tax and financial planning expert at Quilter, also called for greater simplicity.
“Making stocks and shares ISAs more attractive than their cash counterpart could help more people grow their wealth over the long term and direct more capital toward productive investment, which is clearly a goal for this government.
“But any reforms must be handled with care. Cash ISAs remain popular for a reason, they offer security, accessibility and certainty, particularly for older savers or those with shorter-term goals. The key will be finding the right balance and encouraging investment without alienating those who rely on safer options.”
Griffin added: “As a brand ISAs have become increasingly confused with multiple different products and restrictions. Making ISAs easier to understand and use would encourage more people to engage with them, particularly younger savers. Any reform should also maintain strong tax incentives to ensure ISAs remain a compelling option for long-term wealth-building.”
Main image: ash-edmonds-azkczZ4rOgk-unsplash
