How could the government reform ISAs?
The Labour government confirmed plans to make changes to the ISA system at its recent Spring Statement, in a bid to promote a culture of retail investment in the UK.
City figures have welcomed the prospect of ISA reforms, which appear likely to be introduced at the next fiscal statement in the Autumn.
It remains to be seen how the government will reform ISAs. Rumours abound over a potential cut to the limit on annual deposits into a Cash ISA from £20,000 to £4,000.
The future of the Lifetime ISA, which can be used to buy a first home or to save for later in life, may also be up for discussion.
“The product landscape of ISAs is pretty unwieldy,” says Dom House, lead consultant at wealth management consultancy firm Simplify Consulting. “I think it’s hard for consumers to navigate which one is going to be right for them.”
Reducing Cash ISA
According to AJ Bell research, reducing the amount that people can place in Cash ISAs or abolishing them entirely is unlikely to inspire people to invest in the UK stock market.
Most Cash ISA savers (51 per cent) would move the money into a taxable savings account, while just a fifth would invest in UK stocks. This would, therefore, do little to help the government in its push to encourage greater investment in UK assets.
“Reducing the Cash ISA allowance isn’t going to mean that there’s more money going into the UK economy”, says Daniel Payne, chartered financial planner at Golden Oak Wealth Management.
“My Stocks and Shares ISA and all of my clients’ Stocks and Shares ISAs have very little UK exposure,” he continues. “They’re globally diversified and they’re managed by a range of good quality investment companies that actually don’t see the UK as a particularly good investment area.”
The previous Conservative government planned to introduce a so-called ‘British ISA’ that would provide an additional tax allowance of £5,000 for investing in UK shares. Labour abolished this proposal, and it appears unlikely to make a comeback.
“I don’t see how it would work in practice,” says Arthur Hill, chartered financial planner at Citygate Financial Planning. “It was such small fry, the allowance, I don’t think it would make any difference.”
Relax the rules for Lifetime ISAs
LISAs were introduced in 2017 and grant a 25 per cent bonus from the government towards a LISA holder’s first home or retirement. Savers can place up to £4,000 a year in a LISA.
They are popular with savers. HMRC figures cited by AJ Bell show a 43% increase in the amount people paid into LISAs in the 2022/23 period, while the total amount saved in the year hit a record high of £2.4bn.
However, first homes bought with a LISA must be valued at no more than £450,000, raising questions over the product’s suitability in an era of soaring house prices. The average house price in London was £683,986 over the last year, according to Rightmove.
Withdrawing from a LISA to purchase a property above £450,000, or withdrawing before the age of 60, incurs a 25 per cent penalty.
The Treasury Select Committee issued a call for evidence in January as to whether the LISA remains an appropriate financial product.
“I can see an argument for the threshold being raised in London, or if the withdrawal penalty is just scrapped,” says Hill.