Government to review ISA market to boost retail investing

Summary -

• Chancellor Rachel Reeves is reportedly set to launch a review of the ISA market.
• Spring Statement said Government wants to ‘get the balance right between cash and equities to earn better returns for savers’ and ‘boost the culture of retail investment’.
• Chancellor’s Mansion House speech could be used to launch consultation, reports suggest.
• AJ Bell has long campaigned for simplification of the ISA system to help reduce choice complexity and make it easier for people to move between saving and investing.

ISAs have grown to become incredibly popular, with over 22 million ISA holders in the UK. But over time a patchwork quilt of ISA products has emerged, each with their own rules and regulations. Starting with a blank sheet of paper, nobody would design the system we have now.

AJ Bell’s analysis of HMRC figures suggests around £100 billion is held by people with £20,000 or more in cash ISAs who have not invested a penny in stocks & shares ISAs. Millions of people have large cash balances – easily sufficient to serve as a ‘rainy day’ emergency fund – but hold no investments whatsoever.

The key to unlocking that investment has to involve simplification. Gimmicks like the ill-fated UK ISA, rightly kiboshed by the Chancellor, often sound like an attractive political soundbite. But they’re destined to fail. Trying to corral consumers into UK investments by introducing new products, restricting cash ISA limits or introducing mandatory investment quotas will only add complexity and leave consumers lost in an increasingly complex web of saving and investing rules.

Reducing complexity and simplifying consumer choice by merging cash ISAs and stocks & shares ISAs into a single account would create a more fluid landscape in which providers could combine the benefits of cash saving and investing with a single product wrapper.

The current ISA framework labels people either as a cash saver or an investor. In reality, however, most people need a bit of both – cash savings for a rainy day and long-term investments for future growth.

However, faced with overwhelming choice and complexity, many people choose the path of least resistance and in the end save in cash alone, often never even exploring the investment route at all.