Investment platform AJ Bell has reiterated call for ISA simplification, ahead of the Budget on 30 October. Rachel Vahey, head of public policy, comments.
At a time when government is facing significant fiscal constraints and little by way of ‘good news’, ISA simplification offers the opportunity to announce a consumer-focused reform that will benefit investors and the wider economy. As a first step, the government should combine Cash and Stocks and Shares ISAs, the two most popular versions of ISAs in the UK, reducing upfront choice complexity and creating a more flexible system in which consumers could move easily between cash savings and investments.
HMRC data suggests there are around three million people in the UK with £20,000 or more invested in Cash ISAs and no money invested in Stocks and Shares ISAs. If just half of that money was invested for the long term, an additional £30 billion of investment would be unlocked.
Given around half of ISA assets on AJ Bell’s platform are invested in UK companies or UK-focused funds, domestic firms should disproportionately benefit as a result, with the potential for additional retail investment to deepen liquidity and support higher valuations for UK businesses.
Pension taxation
The government has not been coy about needing to close what it says is a surprise £22 billion black hole in the public finances. But before it jumps to a solution it needs to think carefully about the implications. This is especially the case when it comes to pensions, where the temptation to tinker should be resisted.
While in opposition Labour indicated it would reverse the abolition of the Lifetime Allowance, it appears to have accepted this is neither practical, nor sensible.
Pension savers will be hoping Rachel Reeves takes a similar approach to other elements of the pension tax system, and resists tapping pension tax relief to boost government spending power. Such a change cannot be brought in easily or simply. Instead of simplifying pensions tax relief, it would instead introduce an enormous layer of new complexity for all pension savers, employers and HMRC.
The optics of a pension tax raid would be extremely damaging for the government and send the wrong message to savers.
We’d welcome a commitment from government not to fundamentally alter pension tax rules. We need to create a stable environment where pension savers can trust the system they are saving into is stable and predictable.
Lifetime ISA
ISA simplification should be a priority for this government and steps could also be taken to improve the attractiveness of the existing Lifetime ISA.
Helping people onto the housing ladder is a clear priority for the new government and the Chancellor should iron out the kinks in the design of the Lifetime ISA to make it as attractive as possible to would-be homebuyers.
Most obviously, the 25% early withdrawal charge, which effectively acts as a 6.25% exit penalty, is deeply unfair and punishes those for whom a change of circumstances means they can’t pursue their homeownership aspirations. Reducing this to 20%, so it simply aims to return the upfront government bonus, would be a simple, low-cost reform that benefits younger people.
Government should also consider increasing the minimum property purchase price, which currently stands at £450,000, to reflect house price inflation since the LISA was introduced seven years ago.
