It has not always been a proverbial bed of roses – the relationship, that is. On occasion, I have given Isa a healthy dose of criticism for being too awkwardly complex. In response, its master, the government, has rebooted it and given the account a gentle makeover. A restriction lifted here and there. But on the whole, I am a big long-term admirer of Isa. It is not exactly a love affair but more of a special relationship.
Although I grew up with Personal Equity Plans and Tax-Exempt Special Savings Accounts (Peps and Tessas), there is no doubt that it is Isa that has revolutionised the personal savings and investments landscape. It has enabled us – man and boy, woman and girl – to build our own long-term portfolios free from the clutches of the taxman. No nasty capital gains tax on investment profits, no tax on income generated within, and withdrawals whenever we need them – to pay tax bills, complement our retirement finances or to help fund the purchase of a new car. Isas are our own mini-tax havens and we should cherish them. Thank you Gordon.
Indeed, despite being inferior to pensions in terms of their tax attractiveness, they have flourished over the past 19 years. Probably more as a result of the frequent government assaults on pensions than their own unique characteristics. All governments have tinkered with pensions since 1999, seldom to make them more consumer friendly (you can argue both ways on the issue of pension freedoms although auto-enrolment has been a force for good).
Assault on pensions
There have been crazy reductions in the lifetime, annual and money purchase allowances while most additional rate taxpayers have had to look elsewhere for tax-efficient, long-term savings in light of the reduction in their annual contribution allowance. Isas, yes, and also venture capital trusts and enterprise investment schemes. In contrast, the annual Isa contribution allowance is now a rather generous £20,000 – a maximum that few (certainly among my friends) are able to use.
Yet not everything is perfect in the world of Isa.
It is a point expertly argued by a working group that was formed last year by the Association of Accounting Technicians (I am not a member, I am glad to say) to see what can be done to give Isa a smart lean look in its 20s.
The group, comprising a mix of politicians, financial experts and journalists (not me but Laura Shannon, a colleague from The Mail on Sunday), has come up trumps. In its report, Time For Change: A Review Of The Isa Regime, it calls for a decluttering of the Isa mantlepiece. Get rid of all the baggage, it argues, and make Isas simpler.
Its main argument is that the Isa regime has become too complicated. Over the years, it says, chancellors have built a series of Isa extensions, not of all which have fitted comfortably within the Isa house or added to its overall value.
As a result Isas have become something of a hotchpotch. Initiatives such as Help to Buy, Innovative Finance and Lifetime have turned the Isa landscape into a quagmire. A £4,000 annual limit here, a bonus there; a bonus cut off age here, a withdrawal penalty there.
As Mark Farrar, chief executive of the association, said in announcing the group’s findings: “We now have a system where there is an Isa for every day of the week, offering unnecessary complexity, bureaucracy and confusion.” Too right.
The working group’s recommendation is refreshingly straightforward. It proposes the ‘Everything Isa’ – an Isa that we carry with us from cradle to grave.
Cradle to grave
Rather than an annual contribution limit, there would be a lifetime limit of £1m. Unlike the pension lifetime allowance, this would be contribution rather than plan value based. So in time the Everything Isas could accumulate to more than £1m in value because of successful investment management.
Into Everything would be folded most Isas – Junior, Cash, Stocks & Shares and Innovative Finance. There would be two notable exceptions.
Help to Buy, the group argues, should continue but without its Isa label. As its report concludes: “This [Help to Buy Isa] has never been an Isa in the traditional sense and losing the name will make no difference to its successful operation – but a real difference to public understanding of what an Isa actually is.”
As for the Lifetime Isa, the group recommends that it is allowed to wither on the vine. Like others (Ros Altmann, a former pensions minister), it believes it is a mis-selling problem waiting to happen. It says the Lifetime Isa is full of restrictions, penalties and for those who use it for retirement rather than for home buying, a poor version of a pension – without the benefit of tax relief or employer contributions.
Although Brexit will cloud the chancellor’s skies in the coming months, this report from the Association of Accounting Technicians deserves proper consideration. It is built on common sense and would do much to reignite the Isa savings habit. Simple Isa, Everything Isa. Yes please.
Jeff Prestridge is personal finance editor of the Mail on Sunday
