AJ Bell calls on government to prioritise ISA simplification over Cash ISA allowance tinkering in Budget submission

AJ Bell has renewed calls for sweeping ISA reform ahead of the Autumn Budget, urging the merger of Cash and Stocks & Shares ISAs into a single wrapper to boost long-term investing. It also pressed for a ‘Pension Tax Lock’ to protect retirement incentives — a campaign with over 17,000 signatures — alongside calls for Lifetime ISA reform and clarity on pensions and inheritance tax.

Tom Selby, AJ Bell director of public policy, comments:

“With Rachel Reeves intent on ushering in a retail investing revolution in the UK, the big personal finance question ahead of the Budget is how will ISAs be reformed to support that goal? The government has rightly identified that too many people are holding excess cash balances in ISAs that could be put to better work, both for individuals and the UK economy, by investing for the long term. 

“A conservative estimate 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, an additional £30 billion of investment would be unlocked.

“The potential benefits to individuals of investing over the long term, where appropriate, are significant. Someone who invested £1,000 per month in the Investment Association Global sector from 1999 to the end of 2024, for example, would have made £49,211 more than the average Cash ISA return.

“Reports that government is once again considering using stick rather than carrot to address this challenge through a clumsy cut to the Cash ISA allowance are concerning. All the evidence suggests this will simply add to complexity without delivering any meaningful shift in investing behaviour. What’s more, it would likely draw criticism from large chunks of the industry at a time when the government isn’t exactly drowning in praise. 

“Instead, Reeves should address the negative impact the siloed ISA structure has, where people all-too-often simply stick with cash saving when they could be better off investing. The natural starting point for this consumer-focused reform would be to combine Cash ISAs and Stocks and Shares ISAs, the two most popular versions of ISAs in the UK, into a single main ISA product. As well as simplifying the overarching ISA framework, this reform would make it easier for people to transition from holding cash to investing for the long term, supporting wider efforts to boost retail investing, improve financial resilience and drive economic growth.” 

Pension Tax Lock: certainty for pension savers at zero-cost to the government

“Given the significant sacrifice people make when locking their money away in a pension, delivering certainty over the tax treatment of that money would help engender greater confidence in the system. This, in turn, should support the government’s goals of tackling pensions adequacy and increasing capital market participation, including in the UK.

“Every Budget is preceded by feverish speculation about possible tax changes, including to pensions tax-free cash and tax relief on contributions. At the last Budget, this reached a new level and clearly affected people’s choices, with many rushing to withdraw their tax-free cash or increasing contributions because they feared these benefits could be taken away. 

“This uncertainty causes untold damage to people’s confidence in retirement saving and the feeling is growing among industry and the public that government should address this problem head-on. AJ Bell recently launched a petition calling for the government to commit to a ‘Pension Tax Lock’ – a pledge not to change tax relief on contributions or tax-free cash, at least for the rest of this Parliament. With the petition surpassing 17,000 signatures in just over two weeks, the government should now take the opportunity to respond by ending the uncertainty. This would at a stroke remove a significant area of instability for savers and demonstrate this government is truly on the side of hard-working Brits.”

Lifetime ISA reform

“If the Lifetime ISA is to be retained as a dual-purpose vehicle for first home purchases and retirement saving, reforms to simplify the product need to be considered. As things stand, the 25% early withdrawal charge effectively acts as a 6.25% government-imposed penalty where someone accesses their money for anything other than a first home purchase or from age 60. This penalty feels grossly unfair when you consider the unpredictable financial challenges facing millions of younger people today. Reducing the early withdrawal charge from 25% to 20% would end this senseless penalty and make it simpler to communicate the benefits of investing in a Lifetime ISA.

“In addition, the £450,000 maximum qualifying purchase price for a first property using Lifetime ISA funds needs to be revisited to reflect significant house price inflation since the product was first introduced in 2017. If government wants to broaden the appeal of Lifetime ISAs as a retirement savings product, particularly for the self-employed, it could consider removing the age restrictions which prevent people over age 39 from opening an account.”

Bringing unused pensions into IHT from April 2027

“Since the last Budget in October 2024, AJ Bell has consistently urged HMRC to reconsider the approach it is taking to tax pension benefits on death by including unused funds in the calculations for IHT. 

“Under the proposed plans, HMRC will create a devilishly complex and arduous process for all parties involved – personal representatives (PRs), pension beneficiaries, pension scheme administrators (PSAs) and HMRC itself – resulting in distress, additional costs, and time delays for vulnerable, grieving families. In addition, it will result in considerably more work for HMRC, which needlessly runs against the government’s aims to simplify the tax system.

“It is still not too late for government to reconsider their approach, with various alternative options available that work just as well at achieving the government’s stated aims without the hassle associated with IHT. Recent research by Oxford Economics in a report for TISA showed there are alternative solutions for taxing pensions on death that will raise the same revenue for government without the administrative complexities and, importantly, distress for bereaved families imposed by these proposals.”