Do we need one wrapper to rule them all, asks Faith Glasgow.
When the then chancellor Gordon Brown introduced Individual Savings Accounts (Isas) as an enhanced, more generous version of tax-free Personal Equity Plans 20 years ago in 1999, his aim was a pretty simple one: he wanted to get ordinary people more engaged with their finances, and in particular promote the idea that stockmarket investment was the best way to build a more prosperous long-term future.
In those far-off days, and indeed for the first nine years of Isa existence, the overall subscription limit was a relatively modest £7,000. Since then, it has been substantially boosted on three separate occasions, and enjoyed incremental increases in most other years, up to the present £20,000 limit. Not only that, but the Isa family has repeatedly expanded: it now includes not only cash and stocks and shares plans but also Junior Isas enabling parents to save for their children, plus in recent years several other more targeted plans – the Help to Buy Isa, the Lifetime Isa and the Innovative Finance Isa.
But despite the generous annual allowance and that stream of new initiatives, and the fact that around 22 million of us now hold an Isa of some sort, a glance at the latest government statistics suggests the Isa family fortunes are not exactly in the ascendant.
Long past their peak
Figures up to the 2017/18 tax year, the most recent available, show that the number of Isa accounts actually receiving contributions peaked in 2010/11 at around 15 million and that number has since declined pretty steadily to under 11 million in 2017/18. There’s been a modest shift in favour of stocks and shares accounts rather than cash, but over 70% of subscriptions are still into cash Isas.
The actual sums ploughed into Isas of all sorts make more encouraging viewing, rising from under £30 billion back in 1999/2000 to a peak of over £80 billion in 2014/15; since then, though, they have dropped back to £69 billion.
One positive is the rising proportion going into stocks and shares Isas at the expense of cash Isas over recent years; they accounted for around 40% of the total invested in 2017/18. But more broadly there is little sign that Isas have helped to boost UK investors’ participation in UK plc: as James Johnsen of Church House Investment Management points out: “The percentage of private share ownership has declined steadily [from around 20% in the mid-1990s] and currently hovers at a little over 12%.”
Stocks and shares Isas are the bread and butter of most Money Observer readers’ portfolios, and deservedly so – they provide the tax-free environment that enables stockmarket investments to grow faster over time, and then allow investors to boost their regular income or take a lump sum without any worries about tax liability. Clearly, however, if Isas are to fulfil their real potential then something needs to be done to kickstart their broad appeal, and various commentators have been turning their attention to this question.
Johnsen, for instance, suggests the possibility of making contributions tax-deductible, like pensions – though surely part of the appeal of Isas is precisely that they are complementary to pensions, providing completely tax-free payouts that can boost income without the risk of tipping over into a higher tax bracket.
Another idea is to extend Isas’ tax breaks to include inheritance tax (IHT). That might well appeal to the relatively small number of people who are likely to be affected by IHT, but it would hardly speak to the majority, who aren’t. Finally there’s the possibility of opening Isas up to equity crowdfunding schemes channeling funds to very small businesses. But these are inherently high-risk enterprises, and again it would likely be more sophisticated investors who were able to take advantage of such schemes.
More generally, introducing more tax-free country cousins to the party does not seem to me like a good way forward – the Isa space is already messy, confused and overcrowded.
One wrapper to rule them all
What the Isa family needs most is a general tidy-up. Research by Octopus Investments found that many Isa investors are befuddled by the rules; for example, 54% are confused by the regulations around transferring between providers, 52% aren’t clear how many accounts they are allowed to open, and 36% are unsure even what the benefits are compared with other investment products.
That is compounded by the sheer choice of different Isa options now on offer. Streamlining the rules would at least enable existing investors to make easier and better choices, and would be likely to encourage those who have been put off using their allowance so far.
Octopus makes the case for ditching the multiple Isa types, in favour of “a single Isa wrapper in which people could hold lots of different asset classes” – along the lines of Sipps. It argues this would simplify investment monitoring, personal administration, transfers and movements between asset classes. That might be an ambitious administrative change for government and providers, but how appealing for investors in terms of simplicity and transparency.