With the 2023 autumn statement looming, there are suggestions that Jeremy Hunt might reform ISAs.
A number of ideas have been floated, some of which are more welcome than others.
This article isn’t personal advice. If you're not sure what’s right for your circumstances, ask for financial advice. ISA and tax rules can change, and the benefits depend on your personal circumstances. Remember, investments can fall as well as rise and you could get back less than you invest.
The emergence of a mega-ISA?
One idea was a kind of mega-ISA, bringing together Cash ISAs and Stocks and Shares ISAs.
On the face of it, merging these two sounds simpler. But when you dig a bit deeper, it actually risks making things more complicated.
These are very different products, requiring completely different communications, and anyone saving or investing would need to get to grips with both. This adds another layer of complication, especially for people who just want to help protect their savings from tax.
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Is a new type of ISA on the way?
Given the drive to simplify the range, it seems odd that another notion was the launch of a brand new ISA purely for investment into UK companies – with its own investment allowance.
The idea would be to support investment in UK companies, which is a laudable aim. However, this approach risks adding complexity when there’s a far simpler way to crack the same nut.
Our clients invest around three quarters of their ISA portfolios in UK shares. By simply increasing the ISA allowance, it could boost UK investment significantly. It would also be a shot in the arm for investors battered by cuts in the allowances for dividend tax and capital gains tax.
That doesn’t mean there’s not something to be gained from rolling different kinds of ISAs together to streamline the range though.
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What’s next for Innovative Finance ISAs?
One of the questions raised this weekend was around the future of Innovative Finance ISAs, which have had a low take-up.
In many ways it makes sense to roll them into overall Stocks and Shares ISAs. However, this would cause problems when someone wants a small part of their annual allowance in peer-to-peer investments and the bulk in stocks and shares.
Under the current rules they couldn’t do that if they were both Stocks and Shares ISAs.
It's just one argument for a change that would make it much easier to open, subscribe and transfer ISAs, and remove a layer of needless complexity.
We think investors and savers should be allowed to pay into as many ISAs of the same type as they like each tax year, provided they stay within the overall £20,000 ISA limit.
What about Lifetime ISAs (LISA)?
There were other changes notably absent from the ideas floated this weekend, which could lead to better outcomes for investors.
Separating the LISA allowance of £4,000 from the £20,000 for ISAs (instead of being part of it) would help differentiate these products and clear up a major misunderstanding about LISAs. It would also boost incentives to invest.
We also want to see the Lifetime ISA penalty cut from 25% to 20%. The 25% penalty not only claws back the government bonus to save, but also applies an additional 6.25% penalty on the initial investment.
This cut would be a brilliant development for all LISA investors.
It would also help solve the headache of how little self-employed people are saving for retirement through things like pensions. That’s because they wouldn’t have to worry about tying up their retirement savings, while managing on uncertain incomes.
They would also benefit enormously from increasing the age that anyone can open and pay into a LISA to 55.
What should savers and investors do?
We don’t know which of these changes will come into play, or if any at all. So at this stage, you don’t need to worry too much about the implications for your own savings and investments.
However, it’s worth keeping your eye on developments from a government that seems keen to make major changes to the ISA regime. And to consider whether you’re making the most of the ISA opportunities open to you right now.
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