Individual Savings Accounts (ISAs) were introduced almost twenty years ago to encourage people to save, whether in cash or the stock market.
They are increasingly merely providing a tax-free vehicle for people who would save anyway, especially with regard to stocks and shares ISAs, yet they are now becoming ineffective at that too.
There can be little argument that the ISA landscape has become unnecessarily complex. As AAT Chief Executive Mark Farrar has repeatedly said, there is now an ISA for every day of the week.
It’s not just the number of ISAs that are the problem, it is the fact they interact so poorly with each other, have different eligibility requirements and different savings limits. They are quite simply a muddled nightmare for many prospective savers.
The facts bear out fears that ISAs are losing their attractiveness too. According to HMRC figures, in the 2015-16 financial year, cash ISA holders paid £58.7bn into them but in 2016-17, this fell to just £39.2bn.
Time for change
Faced with these facts, AAT felt that the original objectives of each ISA needed to be carefully reviewed, that simplification to encourage greater levels of saving was required and that serious thought should be given to returning to a tax-free savings landscape that offers simple ISAs rather than unnecessary complexity.
To do this, AAT established a cross-party working group, including Sir Graham Brady, Chris Leslie and Kirsty Blackman – all moderate, thoughtful Members of Parliament with a strong understanding of savings policy. They were joined by members of the savings industry – James Daley from Fairer Finance and Andrew Hagger of MoneyComms and Laura Shannon a national journalist with many years’ experience covering personal finance across numerous national media titles.
The result of this nine-month project is the AAT ISA Working Group report, ‘Time for change: a review of the ISA regime’, which makes a number of considered recommendations for reform.
Having looked at all the existing ISAs with a fine toothcomb and analysed their various strengths and weaknesses, it was clear to the Working Group that simply making minor tweaks to the system would not produce the intended results of an ISA system that actively encourages more people to save and, for those who do save, to save more. Radical reform is needed and this is precisely what the report suggests.
AAT felt that the original objectives of each ISA needed to be carefully reviewed
Proposals for change
The report recommendations include removing the ISA name from the Help to Buy scheme, closing the Lifetime ISA to new entrants and folding all remaining ISAs into a single, simple, easily accessible “Everything ISA”.
There are some eye-catching proposals too. For instance, scrapping the annual savings limits in favour of a £1m lifetime contributions limit. Some may think this favours the wealthy but actually the opposite is true. The current rules strongly favour those who are wealthy enough to invest £20,000 year after year but a lifetime limit would help those who have large sums of money for only a short period of time e.g. house deposits, proceeds from a house sale before a replacement purchase is made, insurance lump sum pay-outs and inheritances. At the same time scrapping limits promotes simplicity, is far easier to understand than the numerous different limits currently in operation and makes for easier administration as well.
Other reforms include establishing an “Everything ISA” when a baby’s birth is registered, ensuring future generations are encouraged to save whilst ensuring that anyone who opens any other form of savings account be presented with a tick-box option stating “Add this to your ISA?”, further increasing awareness and consideration of saving in an ISA amongst adults.
The report also recommends that an “Everything ISA” dashboard should be created so that savers can see all their ISA savings products in a single location. This would mean that whatever different types of ISA an individual held, whether cash, stocks and shares or an Innovative Finance ISA, they would all be visible in a single portal, enabling individuals to monitor their savings products and keep a track of what is where, how much is being saved and how each is ISA is performing. This follows the decision to launch a pensions dashboard in 2019 (bringing together state, personal and workplace pensions together in a single place) but will be substantially cheaper to create given the lower level of complexity involved.
Politicians have reacted positively to the report, for example Baroness Altmann has publicly backed the recommendations and Lord Cromwell has asked questions of the Government in the House of Lords.
There has also been a universally supportive response from industry with the UK’s leading investment firm, Old Mutual Wealth and investment broker AJ Bell both publicly backing the proposed reforms.
The Office of Tax Simplification (OTS) have committed to reflect on the AAT ISA Working Group report as they take forward their work on the taxation of savings. Likewise, HM Treasury officials have expressed an interest in the work.
The potential for meaningful change looks promising and it would be a brave person to bet against the Everything ISA being available to everyone at some stage in the future.
Phil Hall is AAT's Head of Public Affairs and Public Policy.