Is an ISA Boost is on the Way?

Is an ISA Boost is on the Way: Reportedly, Jeremy Hunt is planning extensive ISA reforms, including the consolidation of cash and stock products and the introduction of an ISA for UK investments.

The reorganization seeks to simplify the ISA system and stimulate the UK stock market.

According to Treasury insiders, ministers intend to use the 22 November Autumn Statement to increase share ownership and encourage more ISA savings.

The Treasury told MoneyWeek, “HM Treasury is open to suggestions on how to make ISAs more attractive to encourage people to develop a savings habit and invest in a manner that works for them.”

Reforms to ISAs are expected to be announced in the Autumn Statement and not earlier.

DOES THE ISA REGIME NEED SIMPLIFYING?

There are six types of Individual Savings Accounts (ISAs): cash, stocks and shares, junior, lifetime, assistance to buy, and innovative finance. Lifetime ISAs are available to those under 40 and have been criticized for their complexity. Innovative banking ISAs permit investments in peer-to-peer loans, but adoption has been very low. Help to buy ISAs are no longer available to new applicants, but existing clients have until November 2029 to make contributions.

The majority of investors’ funds are channeled into Cash ISAs, which are the most popular vehicles. In 2020-21, according to the most recent official statistics, investors contributed £7,139,000 to cash ISAs and £3,934,000 to stock and share ISAs. A total of £662,000 was contributed to lifetime ISAs, compared to just £17,000 to innovative financial products.

Sarah Coles, director of personal finance at wealth manager Hargreaves Lansdown, says that some simplification would be welcome, but that the Treasury’s rumored plans “risk overcomplicating a well-established system.”

She observes, “One proposed change that initially appears to be a method to simplify life would, in reality, complicate matters for savers. When combining cash and stocks and shares ISAs, it would be necessary to ensure that cash ISA clients do not receive investment-related communications, which could be off-putting and confusing for those who only wish to hold cash.

Creating a distinct ISA allowance for UK investments, according to Coles, “adds an unnecessary layer of complexity.”

Accounting professor Richard Murphy writes on the Tax Research blog that Hunt’s ISA proposals “make no sense” because they would “increase inequality by extending tax reliefs for the wealthy.”

AJ Bell, an investment platform, is in favor of radical ISA simplification, arguing that the various ISA variants “risk undermining a product that has proven to be popular among millions of investors.”

Tom Selby, head of retirement policy at AJ Bell, says, “Combining the best features of the current landscape into a singular ‘One ISA’ product would make it much simpler for individuals to enter the world of investing.

“Without simplification, there is a risk that the engagement war will be won by those peddling high-risk, unregulated investments that all-too-often turn out to be inappropriate or outright frauds.”

However, he is skeptical of connecting an increase in the ISA allowance to an allocation to UK-based investments, stating, “There is a risk that the benefits of diversification will be undermined by encouraging investment in a specific country.”

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INCREASING THE ISA ALLOWANCE

One potential reform that experts would like to see is an increase in the £20,000 ISA limit for all investors, not just those who invest in UK stocks.

Given that the ISA allowance has been frozen at its present level of £20,000 since 2017/18, it could be argued that savers are long overdue for an increase.

According to Coles, increasing the allowance would be a tremendous advantage for investors who have exhausted their allowances and are now subject to severe tax penalties on investments held outside of an ISA.

“An increase in the ISA allowance would be a lifeline for investors pummeled by reductions in the dividend tax and capital gains tax allowances. It would release pent-up demand and enable more money to flow naturally into UK equities, according to Coles.

Increasing the current allowance from £10,000 to £30,000 could result in capital gains tax savings of £35,490 over 20 years for a high-rate taxpayer who invests in equities and shares.

HOW ELSE COULD ISAS BE REFORMED?

Coles suggests that the government should consider making a few minor changes to ISAs that would make them more equitable and straightforward. First, it should be possible to contribute to as many ISAs as you wish per tax year, so long as you do not exceed the £20,000 ISA limit. According to Coles, this modification would simplify the process of opening, subscribing, and transferring ISAs by removing a layer of unnecessary complication.

Changing the lifetime ISA should also be one of Hunt’s top priorities. Coles explains: “Allowing the £4,000 lifetime ISA allowance to be added to the £20,000 ISA limit would help differentiate these products and increase investment incentives.”

“We want the lifetime ISA penalty to be reduced from 25% to 20%.” In addition to recouping the government bonus for saving, the 25% penalty presently applies an additional 6.25 percent penalty based on the amount invested.”