Complex Isa regime in need of ‘radical shake-up’

A group of MPs and savings experts have called on the government to scrap the current regime of multiple Isas in favour of an ‘Everything Isa’ instead.

In a new report, the Association of Accounting Technicians (AAT) highlights how much complexity has been created for what was originally meant to be a simple and tax-efficient savings vehicle. The report states: ‘There is now an Isa for every day of the week, offering unnecessary complexity, bureaucracy and confusion for consumers.’ 

Isas currently available are: the cash Isa, stocks & shares Isa, junior Isa, help-to-buy Isa, innovative finance Isa and lifetime Isa.

Some Isas (such as the junior Isa and lifetime Isa) have age limits, while others do not. While some have a maximum savings limit of £20,000 per year (for example the cash, stocks & shares and innovative finance Isas), others have much lower limits and different kinds of bonuses and restrictions (the junior, help to buy Isa and lifetime Isa, for instance). 

The report points out there is also a mind-boggling degree of interaction between Isas, so that whatever you save in, for instance, a lifetime Isa has to be deducted from the amount you can save in a cash or stocks & shares Isa. Thus if you save the maximum £4,000 permitted into a lifetime Isa, you can only save up to £16,000 (instead of £20,000) in a cash or stocks & shares Isa. 

To simplify Isas and increase the number of people who are saving, the AAT calls for an ‘Everything Isa’ to be established. People would receive one Isa at birth, and when opening any savings account, a tick-box option stating ‘Add this to your Isa?’ would be provided, further increasing awareness.

Second, the group suggests a digital dashboard should be created, where savers can see all their Isa contributions in one place. And finally, it argues the annual savings limits should be scrapped in favour of a £1 million lifetime contributions allowance. 

-This one rule change would make Isas less complex

Conservative MP Sir Graham Brady says: ‘Simplifying the Isa regime and making it easier for people to save at times in their life when they can afford to do so, would help more people to provide effectively for their future.’

Labour MP Chris Leslie says: ‘The environment for savers is quite different from when Isas were first introduced, so it's time to review and refresh the thinking about these comparatively well-known and widely used products.’

Various industry experts have backed this radical overhaul. Tom Selby, senior analyst at AJ Bell, says: ‘The success of Isas was built not only on the tax benefits available but also on the simplicity of the rules. However, politicians have gradually chipped away at this through the layering of unnecessary complexity, forcing savers to wade through a quagmire of allowances and rules to find the product they want.’

He adds: ‘Indeed, it is possible a “Care Isa” will be added to the mix as policymakers scrabble for sticking plaster solutions to the long-term care crisis.’

Rachael Griffin, tax and financial planning expert at Old Mutual Wealth, says: ‘A simplification of Isas and, in particular, the establishment of an Everything Isa, could mean savers just need to get grips with one set of rules and features.’ She argues the AAT’s proposal would set up a new generation of savers with the tools they need. ‘The government needs to take heed of these recommendations and take a close look at how it can make the maze of Isas less complicated.’

Commenting on the report, Ros Altmann, former pension minister, points out that ‘there are significant risks of a mis-selling scandal associated with the Lifetime Isa’. She adds: ‘Helping individuals with house purchase may be an important policy aim, but this should not be confused with, or undermine, putting money aside for retirement. Workplace pensions are undoubtedly the best way for almost every employee to set money aside for later life.’

She also points out that ‘for the average saver, recent tax changes that permit £1000 of annual tax exempt savings income and £2000 for dividend income, have reduced the attraction of Isas overall.’

A new, and overhauled, Everything Isa could ensure that the tax-efficient savings vehicle continues to be relevant and a good way for people to save. 

Younger generations, who don’t benefit from final salary pensions and are less likely to build up housing wealth, could especially benefit from a simplified savings product.

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