ISAsMar 7 2019

Are there too many Isas?

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Are there too many Isas?

When the Isa was launched back in the late 1990s, it was kept quite simple.

After the Insurance Isa was dropped, all one had to choose from were cash or stocks and shares Isas.

The concept was simple: invest your money in the stock markets or put it in a bank account, and any interest or growth in the capital and dividends would be tax free.

It was curtailed by how much one could put into it each, but fundamentally the product stayed simple and attracted huge inflows.

Now, as of 2019, there are five types of Isa: cash, stocks and shares, Lifetime, Innovative Finance and Help to Buy - although the latter will be closing to new accounts later this year.

Isas were so successful because it was one product with two options: cash or investing, and that was it. Adrian Lowcock

While cash, and stocks and shares remain the same as ever - with the overall saving limit being £20,000 - Lifetime and Innovative Finance Isas take a bit more understanding.

The Help to Buy concept has been rolled up into the Lifetime Isa.

Too much choice

Adrian Lowcock, head of personal investing at Willis Owen, says: "I do think all the Isas launched under [former chancellor] George Osborne went too far. 

"Some people were asking for a Care Isa, for example. Why not just call it an Isa? It can be for whatever you want it to be.

"All these got launched with the best of intentions: the Help to Buy was the right thing to do and with the Lifetime Isa you can understand why they're doing it, but the one thing you don't need for sure is too much choice."

He points out: "Isas were so successful because it was one product with two options: cash or investing, and that was it."

Jamie Smith, a financial adviser at Foster Denovo, agrees: "Currently each Isa is supposed to serve a different purpose, but there is scope for some simplification. The consolidation of the Help to Buy Isa into the Lifetime Isa from November 2019 is an example of a step towards this.

"Even the tax benefits for each Isa type can differ. For example, the Lifetime Isa offers a bonus of up to £1,000 per annum but the standard stocks and shares Isa does not."

The Lifetime Isa was launched in 2017 as a way to encourage more people to save into a pension and also for a property, taking the place of the Help to Buy Isa in November.

But it comes with many rules attached. For example, those over 40 cannot invest in one, and while the tax contributions might be generous (25 per cent of that year's saving, up to £1,000 each year), if you access the money for reasons other than buying property or a pension, then savers will lose 25 per cent of their entire savings, ultimately losing money that they have saved.

Table 1: Amounts subscribed (£millions)

 CashStocks and sharesInnovative FinanceLifetime IsaTotal
2015-1658,69421,129  79,823
2016-1739,19122,32536 61,552
2017-1839,80128,70229051769,310

Source: HMRC

Mr Lowcock says this has become too complicated, and people should just be able to save into an Isa, and suggests that perhaps pension legislation should be fixed to encourage more people into long-term saving.

"Big parts of the population can't afford to save into an Isa, and the government is trying to get the Lifetime Isa to encourage more saving," he explains.

"But it should be linked to stuff that's more relevant to them. The tax benefits and structure are quite attractive but, to me, it felt it was halfway between a pension and an Isa.

"I would just keep a simple suite of products - a pension Isa would have been better than a Lifetime Isa."

Kneejerk reaction?

One of the newer Isas launched by Mr Osborne was the Innovative Finance Isa, allowing investors to invest money via a P2P platform, and to put their savings into an Isa.

There have been criticisms that this is encouraging people to invest in risky loans that offer a good return, but which could involve the investor losing some of their money.

Frazer Fearnhead, chief executive of The House Crowd, says, on his platform, investors put money into a range of loans as a means of diversification.

"It has a targeted return of 7 per cent. If the borrower defaults we do have a provision fund of 10 per cent, which would cover 10 per cent of any loss," he notes.

"Cash Isas are paying quite poor returns that don't keep up with inflation, and stocks and shares Isas fell by about 12.5 per cent in 2018. If people had money in their Isas they lost 12.5 per cent, they would have to gain 15 per cent to make up the losses."

He continues: "People have been looking for an alternative to cash. With the Ifisa, clearly there are risks, but I consider them to be less risky than a stocks and shares Isa. People want consistent returns without that volatility of investing in equities.

"We make it clear as to how the property is secured, and we're lending up to a certain LTV, which is 75 per cent. We do point out that their capital is at risk, and if the borrower does not repay the loan we do repossess the property."

However, Mr Lowcock believes the Ifisa was a bit premature, coming to a market that had not yet fully developed.

He says: "It felt like a kneejerk reaction to a developing industry, and validating an industry before it was ready to be validated. 

"If that sort of product was fine to be put into an Ifisa then it was alright to be put in an Isa. Why do you need a separate Isa?"

melanie.tringham@ft.com