The Spring Statement document says the government wants to get the “balance right” between cash and equities in ISAs as part of efforts to push through a retail investing revolution. But scaling back the Cash ISA limit would be deeply unpopular and risk undermining Labour’s commitment to deliver ISA simplification.
AJ Bell urges Reeves to reform the system for the benefit of consumers by:
- Radically simplifying the upfront choice available to investors, initially by merging Cash ISAs and Stocks and Shares ISAs into a single main ISA product
- Introducing improved help for savers and investors through ‘Targeted Support’ reforms
- Government should remove the disincentive to invest in UK Plc by scrapping stamp duty on UK shares bought through ISAs – a reform which would cost around £120 million
Michael Summersgill, chief executive of AJ Bell, comments:
“Chancellor Rachel Reeves made clear ahead of the Spring Statement that she wanted to bring about a retail investing revolution in the UK. Despite holding off on reform today, the government has confirmed change to the status quo is being considered ahead of the Budget later this year, with Labour having already committed to ISA simplification and encouraging greater use of Stocks and Shares ISAs during the general election campaign.
“Some have argued that Cash ISA allowances should be scaled back to effectively shove people towards investing, and the Spring Statement document says the government is looking at ways to get the ‘balance right between cash and equities’ when it comes to ISAs. However, research conducted by AJ Bell focused specifically on Cash ISA savers suggests this will not be an optimal way to shift consumer behaviour, with only one-in-five1 saying they would migrate to investing in the UK stock market if the Cash ISA allowance was reduced or abolished.
“On top of that, any restriction on the amount of cash held within ISAs would also run counter to Labour’s stated aim to simplify the ISA landscape. Rather than having a simple-to-understand £20,000 overall limit, people would have a limit within that limit and there would need to be complex restrictions on transfers from Stocks and Shares ISAs to Cash ISAs to prevent people gaming the system.
“One of the reasons the British ISA was such a bad idea was that it would have added horrendous complexity to an already complicated ISA system. Having rightly ditched this daft proposal, Reeves would risk achieving a similar outcome.”
AJ Bell’s blueprint for ISA reform: better help for investors, simplification and a genuine incentive to invest in the UK
“Instead of fiddling with Cash ISA allowances, a package of straightforward reforms could bring us a step closer to Reeves’ aim of a retail investing revolution.
“First, the government must press ahead with proposals which will enable financial services firms to give customers more useful nudges about their finances through ‘Targeted Support’. This will enable millions of people to make better-informed decisions about their finances, including investing for the first time or transitioning from cash to investing. The prize here is significant – AJ Bell’s analysis of HMRC figures suggest around £100 billion of money is held by people with £20,000 or more in Cash ISAs who have not invested a penny in Stocks and Shares ISAs2. Some will have sensible reasons for only saving in cash, such as building up a rainy day pot for emergencies, but it’s likely many others have a longer-term time horizon and should consider reaping the rewards of investing.
“Second, to support the introduction of Targeted Support, government should undertake a thoughtful review of the ISA landscape, with a clear focus on simplification and boosting retail investing. Part of the reason for the success of ISAs since they were created in 1999 has been their simplicity. Interventions by successive governments have chipped away at this and there are currently six different versions of ISAs in the UK, with different limits and rules applying to each version of the product. Furthermore, having a separate product for those saving in ‘Cash’ and an entirely different one for those investing in ‘Stocks and Shares’ creates an unnecessary barrier – namely the necessity to open a new account to invest for the long term. Combining Cash ISAs and Stocks and Shares ISAs into a single main ISA product would make it simpler for people to transition from the former to the latter, and in the process reduce the upfront choice complexity which we know puts people off.
“As a final cherry on the cake, Reeves should review the impact of stamp duty on UK shares – a tax which explicitly disincentivises investment in British companies at a time when government policy is aimed at doing precisely the opposite. While the multi-billion-pound annual cost of scrapping stamp duty across the board might make the chancellor wince, creating a specific carve-out for ISAs to support her retail investing drive could be achieved at a fraction of this cost – we estimate somewhere in the region of £120 million3. In government spending terms, that is pretty much a rounding error and would remove a nonsensical barrier to ISA investors buying shares in UK businesses.”
2Source: ISAs unpacked: who holds them and how much do they have? | AJ Bell
3Estimate based on analysis of total stamp duty paid by AJ Bell customers over the last 12 months, extrapolated across all UK ISA accounts.
