ISA Reforms: Too Little, too Late?
Recent reforms to the ISA regime fall short in several key respects.
Over recent months, HM Treasury, mindful of the need to encourage personal savings, has announced some changes to the rules governing investment in Individual Savings Accounts (ISAs). Much has been made by successive Governments of the importance of long-term savings and the role that tax incentives can play, so the new rules are designed to make ISA investment easier to understand, to offer more flexibility and fewer restrictions, and thereby to encourage more people to save.
The New ISA Rules from April 2008
The salient features of the new rules are:
- They all come into force in April 2008, for the tax year 2008 / 09.
- The confusing Maxi and Mini ISA distinction is removed so there will simply be two ISA types, Cash and Stock-market.
- Funds in an existing Cash ISA will be transferable to a Stock-market ISA
- Existing Personal Equity Plan holdings will become ISAs so that a single regime will apply for all tax sheltered savings (outside pensions).
- A Child Trust Fund can be “rolled over” into an ISA at the investor’s 18th birthday to preserve its tax-exempt status.
- ISAs will continue to be made available beyond the original end date for new subscriptions of April 2010.
The New Rules: How Much of a Step Forward for ISA Investors?
The changes are a step in the right direction, but we believe they fall short in at least two respects.
The first is contribution limits. The increase in the contribution level is almost derisory, given that the previous level will have been unchanged for nine years by the time the change comes into effect. The financial services industry had been lobbying for an increase in the overall limit to £10,000 with a maximum £5,000 cash element, and we think that’s the least that should have been done. The only consolation is that the Government has pledged that the limit will always be at least £7000 per annum in future (even this is double-edged, since it implies that the increase to £7200 could be reversed).
The second is that the reforms fail to address the serious and pressing need to improve the financial literacy of the investing public. When the FSA’s own survey reveals that four out of every ten investors in Stock-market ISAs don’t even understand that their investment is affected by movements in share or bond prices, then it’s clear that it’s not only in respect of our children that “education, education, education” should be the Government’s mantra. So-called simplified “stakeholder” products, whilst a step in the right direction, have so far had only a marginal effect, largely because, whilst they may make a product easier to understand, they still assume a level of understanding about investment principles that is generally lacking. If we are going to lecture people on the importance of investing wisely to fund their own long term futures, then we should spare no effort to raise the public level of understanding of, and confidence in the way long term investments work.
We’re not alone in our concerns: the changes have prompted an almost universally half-hearted response. Whilst, in general, they’re welcomed as a step – albeit a small one – in the right direction, a commonly expressed feeling among providers, advisers and consumer groups alike is that it’s simply too little to have any significant impact on savings habits.
Given a populace that generally isn’t saving enough for its own long-term financial well-being, we think a more radical approach is called for, as opposed to what seems to be tinkering around the edges.
ISAs: Reforms We Would Like to See
With the above in mind, here’s our ISA “wish list”:
- An increase in the contribution limits to at least to £10000 for Stock-market ISAs and £5000 for Cash ISAs
- An extension of the tax benefits on equity ISAs so that tax savings are a genuine incentive to all would-be investors rather than primarily aimed at the “higher rate taxpayer” few.
- The introduction of an “awareness programme” co-sponsored by Government, FSA and the industry along the lines of the FSA Financial Capability Initiative, but concentrating specifically on raising understanding of the importance of long-term investing . The campaign should be “non-technical” and wide-ranging, and use simple, powerful, messages.
