ISAs still have room for improvement

In the world of tax wrappers, the abolition of the pension lifetime allowance is currently taking up a lot of oxygen. However, there are changes afoot with individual savings accounts (ISAs) too, and in the Autumn Statement on 22 November 2023 the Chancellor announced several rule changes with a view to simplifying ISAs.

From 6 April 2024, investors will be able to pay into multiple ISAs of the same type in the same tax year. Partial transfers of current-year funds between providers will be permitted. Investors will no longer need to reapply when paying into a dormant ISA. The minimum age for an adult cash ISA is also being increased from 16 to 18, which will mean it’s aligned with other adult ISAs.

We don’t yet have the regulations for how these will be implemented, but these are all promising developments that will make life simpler and easier for providers, advisers and investors. I also look forward to seeing how HMRC plans to digitalise the ISA reporting system and make fractional share ownership possible.

However, there are still areas that are worth looking at. Here are two developments I’d like to see and one I wouldn’t.

The first relates to the distribution of ISAs on death. Currently, an investor’s ISA can effectively be passed to their surviving spouse when they pass away, but the mechanism for this – the additional permitted subscription (APS) – involves giving the spouse a one-off increased allowance equal to the deceased’s ISA. The spouse can then pay the funds they inherit from the deceased’s ISA, or funds they hold elsewhere, into their own ISA to take advantage of the increased allowance.

If that sounds a bit confusing, it’s because it is. It would be much more straightforward to simply allow the deceased’s ISA funds to be transferred directly to an ISA in the name of the spouse, avoiding this unnecessarily circuitous process.

Also, what next with the Lifetime ISA? Investors used to have a nice binary choice between an ISA and a pension. The ISA comes with tax benefits. The pension comes with more tax benefits, but it’s locked away until age 55 (soon to be 57). In 2017, however, the LISA gate-crashed that decision-making process by introducing a third option that has elements of both ISA and pension.

It could be politically perilous for the government to withdraw support for first-time home buyers, and it has thus far resisted calls to make a bigger overhaul of the ISA framework. If the LISA is to remain, I would call for the withdrawal charge (which is payable on withdrawals other than for a house purchase or retirement) to be reduced from 25% to 20%. This means it would just recoup the initial bonus plus any growth on it and no more. I would also re-examine whether the £450,000 limit for the first-time home should be higher.

One development I’m hoping we don’t see is the introduction of a “Great British ISA”, which was mooted in the run up to the Autumn Statement. The proposal was that a further £5,000 ISA allowance would be granted in addition to the current £20,000 but it would only be possible to purchase shares in UK-listed companies using those funds.

I fear this would only add further complexity for investors by adding to a growing suite of ISA types. More importantly, the focus of ISA changes should be on boosting outcomes for British investors not British businesses. If we lose sight of that, we run the risk of tarnishing the ISA brand, and that will benefit no one.