Why are Chancellors obsessed with ISAs?
Number 11’s fixation with tinkering with ISAs is testament to their success, writes James Ashton
You would think that something has gone wrong with ISAs, launched by Gordon Brown as Chancellor in 1999. Why else would successive inhabitants of 11 Downing Street be forever tinkering with the UK’s flagship savings product?
Actually, with 23m adults in possession of one and a tidy £952bn tucked away in total, it is their huge success that keeps Treasury officials glancing in their direction over and over. From the British ISA to the Starter ISA, via carrots, sticks and political about-turns, any proposed changes might not make it to the statute book but they will certainly provoke heated debate across the financial services industry that itself has so much invested here.
Who are ISAs actually designed to help?
The ISA is often held up as the solution to that Great British problem that everyone should be making greater provision for their old age. One in 10 adults have no cash savings, according to the Financial Conduct Authority, and the Pensions Commission found recently that around 15m people are under-saving for retirement. The premise seems to be that ISAs work – so how to make them work even better?
The trouble is everyone has an angle on change. Building societies like the flows into Cash ISAs to underwrite the mortgages that account for the other half of their business, while many stock market-listed companies want to see a portion of this giant £420bn cash pile deployed in Stocks and Shares ISAs to bolster their share price.
What about the consumer? It’s their money after all. Cash or shares, an ISA at its best is a simple, tax-free scheme with a multiplicity of end uses: a new house, university fees or maybe even a world cruise. Financial wellbeing is an enabler for the individual, not merely a byproduct of the system.
People don’t respond well to being told what to do, but that doesn’t mean encouragement doesn’t have a place. The industry-backed Invest for the Future campaign – the one that features Savvy the Squirrel – aims to shift long-standing perceptions and support more people in seeing investing as something for them, the natural next step from saving. So-called “targeted support”, launched in April, should make it easier to get that message over.
Financial inclusion
However, the reality for many is it is hard to put anything away, not least because the growth in real household disposable income this decade is on course to be the worst on record, the Resolution Foundation projects.
The government’s financial inclusion strategy does its best to address this looming issue. One of its strands intends to make it easier for employers to offer workplace savings schemes, an acknowledgement that salting away a few pounds per month directly from a person’s payslip can be habit forming. But so often financial guidance reaches people when they are short of choices, for example tackling debt instead of considering saving.
From September 2028, financial education starts earlier, when it becomes compulsory for all primary school pupils in England. This initiative should be accompanied by measuring progress. That’s why Callum Anderson MP is on the money with his campaign for the UK to take part in the OECD’s next Programme for International Student Assessment (PISA) in financial literacy, which would rate the ability of our 15-year-olds in this area against an international peer group.
Models from other countries
While the UK changes its mind over ISAs, innovation is taking place elsewhere. The tax-free savings amount for Sweden’s well-liked ISK savings product doubled this year and the range of eligible assets is being broadened – although the effective tax rate is rising too.
In the US, it is early days for Trump Accounts but they appear to have captured the imagination. These infant savings accounts are being seeded with a $1,000 state donation for every child born during Donald Trump’s second presidential term and invested in a basket of US stocks.
The scheme bears some resemblance to the Child Trust Funds which were curtailed in 2011 and from which – amazingly – a collective £1.5bn remains unclaimed. Such inertia reminds me that the ISA limit last rose in 2017. If £20,000 then had kept track with inflation now, it would be worth more than £27,000 – excellent news for the circa 2m savers who typically max out their ISA annually.
Of course, many savers can only dream of setting so much aside. But dreams are a good start for getting to grips with individual financial realities, whatever system the Chancellor of the day puts in place.
James Ashton is a business adviser and former chief executive of the Quoted Companies Alliance