For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
Are ISAs on the decline?
Following their inception at the end of the twentieth century, the popularity of ISAs initially soared. Unlike so many savings and investment products which intertwine with Britain’s fiendishly-complicated tax system, ISAs – and, in particular cash ISAs – presented a simple and straightforward means through which consumers could build their nest eggs.
Yet in recent years, the winds have shifted. The so-called ISA season – a period generally accepted as lasting 4-6 weeks either side of the financial year end – used to be characterised by a bonanza of deals, as providers sought to offer the best ISA rates in a bid to secure as big a slice of individuals’ ISA allowances as possible.
ISAs: A decline in numbers
In recent years, however, this ‘frenzy’ has dissipated into something of a non-event, with precious little in the way of an uptick in competitive deals. As a result, the enthusiasm for using ISAs as a vehicle for savings has declined. Cash ISAs in particular endured something of a bloodbath last year, with HMRC reporting that just £39.2bn was put into cash ISAs for the 2016-17 tax year – a drop-off of £19.5bn from the year before. Experts believe this trend is set to continue, with stocks & shares ISAs - which enable investors to buy stocks, bonds or funds without having to pay tax on their gains and dividends – now accounting for around 54 per cent of ISA capital in the UK.
Yet while the number of stocks & shares ISA subscribers enjoyed a small spike in 2016-17 (2.59 million, compared with 2.54 million in 2015-16), numbers had steadily fallen in the years prior. Similarly, the downward trend for cash ISAs was underscored by the fact that the number of annual subscribers fell from 10.1 million in 2015-16 to 8.5 million in 2016-17.
Data is limited for the Innovative Finance ISA (IFISA) and the Lifetime ISA over this period owing to a lack of providers offering the product prior to April 2017. The Help-to-Buy ISA, however, has been a bit of a damp squib, with around 1.1 million accounts opened to date. The Treasury has recently stated that this has fallen well below expectations.
Why are ISAs becoming ‘less popular’?
The decline of cash ISAs is easy to pinpoint. Derisory interest rates, a lack of competition from challenger banks and the advent of the Personal Savings Allowance have all combined to undermine the benefits of this once-popular savings product.
The risks and volatility associated with stocks & shares ISAs continue to be a barrier to entry for many too, despite the potential for significant gains.
Uptake of the IFISA will be fascinating to observe, but expectations for the Lifetime ISA are low, given the continued lack of providers throughout the current tax year. As for Help-to-Buy ISAs, many people attribute its mediocre performance to the prohibitive house price caps (£450,000 in London and £250,000 outside) for which the bonus component is applicable.
Are ISAs too complex?
In addition to the above reasoning, some also believe that the ISA framework itself has become too complicated. As something that used to simply cover cash and investments, ISA legislation now incorporates home buying, retirement planning, peer-to-peer lending and all sorts of other asset classes within investment ISAs. Furthermore, plans are being drawn up to create a new ISA to cover later-life costs such as social care.
For some, it may be viewed as an abundance of choice. But for many others, the implications of such expansion are dizzying, given that we as consumers are left to our own devices to work out how many ISAs are permitted, and which ISAs we can simultaneously open and subscribe to. It is also up to us to educate ourselves on the limitations, risks and fine print of each one, and then take a decision as to which products are still suitable.
The relationship between complexity and consumer uptake is usually inversely proportional, and ISAs are no exception. Which is precisely why a group of professionals and cross-party MPs (on behalf of the Association of Accounting Technicians) have produced a report called ‘Time for Change’. The crux of this report? The proposal of something rather novel: the ‘Everything ISA’.
What is an Everything ISA?
Rather than having multiple branches of ISA products and categories, Time for Change suggests bringing cash, stocks & shares and Innovative Finance ISAs (and Junior ISAs) all under one umbrella. All savings and investments would be protected from tax within a single wrapper, viewable on a single dashboard – in much the same way as the incoming pensions dashboard will collate personal, workplace and state pensions into a single user portal.
The report goes further in proposing that the ISA allowance should be replaced by a lifetime allowance (set at £1 million, excluding interest and profits earned), thus meaning individuals aren’t bound by the ‘use it or lose it’ rules pertaining to the current annual limit.
And while suggesting that the Lifetime ISA should be terminated, the group believes that the benefits of schemes such as the Help-to-Buy ISA could be retained, with bonuses still awarded to savers for setting money aside for a deposit on a first home. The key is that this would be done within the Everything ISA, rather than through a separate, standalone account.
Back to first principles
The aim of the Everything ISA would not be to diminish the degree of choice at the fingertips of consumers; merely to simplify it, and eliminate the mutual exclusivity of the use of ISAs within the same category during the same financial year. The practicalities in terms of implementation may yet need to be better articulated – not to mention the fact that amalgamating a collection of savings and investment products with vastly different properties together could create confusion of its own - but it does provide some interesting food for thought nevertheless.
We’ll know more about the status quo and standing of ISAs after the conclusion of the 2017-18 tax year, as figures and data are released. But recent history suggests that we shouldn’t be optimistic, and despite the dynamism that consumer-friendly newcomers such as the IFISA have brought to the table, continued bolt-ons elsewhere within the framework run the risk of further increasing the level of complexity for the average consumer.
If not a silver bullet in itself, the idea of the Everything ISA should at least ensure our politicians remember what made ISAs so popular in the first place: their simplicity and user-friendliness.
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