Rachel Vahey, head of public policy at AJ Bell, argues that the government has missed a chance to make ISAs simpler and more flexible, instead introducing changes that risk adding complexity and discouraging new investors.
Rachel Vahey, AJ Bell head of public policy, says:
“Pre-election promises signalled the chancellor’s ambition to simplify ISAs and boost retail investing. Consumers could have been granted the freedom to move seamlessly from saving to long-term investing had government scrapped the arbitrary distinction between Cash and Stocks and Shares ISAs.
“Unfortunately, the opportunity for radical simplification has been missed.
“Rather than minimise friction between saving and investing, these reforms reduce flexibility, entrench the divide between cash and investment accounts and introduce tax charges and complex age-related allowances.
“Riddled with unintended consequences, the reforms do little to encourage new investors. Faced with increasingly complex ISA rules, many would-be investors will stick with what they know: cash.
“What’s more, investors seeking to de-risk in the near future will likely be prompted to switch to cash prematurely before the chancellor pulls up the drawbridge on transfers between cash and investments.
“A small number of savers will be pushed to look beyond the bank due to a reduced £12,000 Cash ISA allowance. But that will be offset by others for whom the lower allowance and new charge on cash interest drives a scarcity mindset that means they put more in Cash ISAs, not less.
“Ultimately, for most investors Stocks and Shares ISAs will remain a simple, straightforward option and the wrinkles which these reforms introduce will be ironed out as people adapt. But so much more could have been done to simplify consumer choice. In time, we hope policymakers will revisit the case for simplifying the ISA system, undoing these reforms and focussing on making the savings and investment landscape work better for consumers.”
How these rules will work in practice
“The new rules mean a charge of 22% will be applied to interest paid on cash in investment ISAs. This is a flat rate charge, meaning the same rate applies whether the ISA account holder is a basic rate taxpayer, higher rate taxpayer, or indeed doesn’t pay any income tax.
“The ISA holder cannot invest 100% of their (non-cash) investment portfolio in money market funds, or that would be classed as a ‘non-qualifying’ investment. This means they could invest 99% in money market funds and 1% in, say, UK equities and that would be allowed.
“It also means they could hold 50% of their portfolio in cash, but if the remaining 50% was held in money market funds that wouldn’t be allowed. Whereas if they held 49% in money market funds and 1% in UK equities, this would be permitted under the rules.
“The rules on charges on cash interest and not holding 100% of your investment portfolio solely in money market funds also apply regardless of how old the ISA holder is. This is far simpler to administer than applying the new age 65 rules universally, but will likely exacerbate the scarcity mindset around Cash ISAs and lead to more transfers between investment ISAs and Cash ISAs before April next year.
“However, the lower Cash ISA allowance of £12,000 and the ban on transfers from Stocks and Shares ISAs to Cash ISAs only apply to those ISA holders who are younger than 65.”
