City calls for ISA reform to promote investment culture
City figures are calling for a complete overhaul of the ISA system as rumours around the future of the tax wrapper begin to swirl.
Earlier this week, Chancellor Rachel Reeves announced, as part of the government’s Spring Statement, that it was looking at options to reform ISAs, with a focus on promoting a culture of retail investment in the UK.
While no further details were given on what reforms will be considered, reports ahead of the event had suggested Reeves was in talks to cut the limit on annual deposits into a Cash ISA from £20,000 to £4,000.
Experts believe this would help channel money into Stocks and Shares ISAs, which could help boost the investment culture in the UK.
While Reeves ultimately chose not to pursue the plan in the Spring Statement, it hasn’t been ruled out, either.
City PM spoke to experts who expect any changes to ISAs to be announced in this year’s Autumn Budget.
Is the Cash ISA living on borrowed time?
While some in the City initially supported the rumoured cut to the Cash ISA limit, analysts are split on whether the idea is worth pursuing.
Moneybox head of personal finance Brian Byrnes told City PM that, in his over a decade of experience as a financial advisor, reducing the ISA limit “would not make one person more confident about investing.”
Instead, he argued that the government should focus much more on financial education to help savers build the confidence they need to invest.
“Reducing the tax incentives for the Cash ISA isn’t the answer, and could expose diligent savers to tax,” added Sarah Coles, head of personal finance at Hargreaves Lansdown.
Instead of simply cutting the limit, many in the investment industry are also calling for Cash, Stocks and Shares, Junior, and Innovative Finance ISAs to be combined into a single product.
Investment giants like AJ Bell and Fidelity International have backed the plans, arguing that they would simplify the financial product and encourage people to invest. This is especially true given that twice as many people currently use a Cash ISA over a Stocks and Shares ISA.
Wander Rutgers, UK CEO of investment platform Lightyear, told City PM: “A single, flexible ISA with one wrapper strips out the needless complexity, giving investors real freedom to manage their savings and investments on their terms.”
“At the moment, retail investors are navigating a complicated web of different wrappers for Cash and Stocks and Shares ISAs,” added Rutgers.
“The distinction is moot at best, and counter-productive at worst, making it harder for people to switch between the two and get the most for their money.”
LISA investors save more
Polling from Fidelity International found that 37 per cent of UK adults said they would be open to a single combined ISA, with 25 per cent saying they would use it to begin investing or increase their investment contributions.
Furthermore, the product would encourage 12 per cent of those who don’t currently invest to begin as soon as the next tax year, which would create the equivalent of 6.4m new investors.
Another possibility for ISA reform may come from a relatively new form of the investment vehicle: The Lifetime ISA (LISA).
LISAs were introduced in 2017 and have seen a massive surge in popularity thanks to the government’s 25 per cent saving bonus.
According to data from Moneybox, 79 per cent of LISA holders report that they have been saving more consistently since opening the LISA. A total of 75 per cent now save weekly or monthly, up from 54 per cent before opening the account.
Being the fastest growing investment product across many investment platforms, analysts such as Moneybox’s Byrnes said examining its success could be the solution to finding a path on ISA reform that everyone can agree on.
Others, such as Hargreaves Lansdown, have suggested simply dropping the ‘stocks and shares’ language and updating the ISA to call it an investment ISA, which could attract those who are more nervous about the stock market.
“If the government wanted to be really radical here, it could leave the questions around suitability of products to be held within the ISA to the FCA so that there’s an integrated approach in future,” said Anne Fairweather, head of public policy and government affairs at Hargreaves Lansdown.