It’s time to simplify ISAs

Cast your mind back to April 1999.

Were you already working, or still at school, or university? Were you listening to No Scrubs by TLC (riding high at number 1)? Maybe you were watching Peggy Mitchell marry Frank Butcher in Eastenders?

Or were you monitoring the launch of ISAs, the successor of PEPs and TESSAs, and their effect on the UK savings market?

ISAs have now been with us for nearly a quarter of a century. And on the whole, they are a success story. Recent research by AJ Bell shows that 96% of UK adults have heard of them, and 71% said they are familiar with them.

But they are not perfect.

They started as a simple savings product. But over the past few years, through various government interventions, we now have six different types of ISAs, all aimed at satisfying different savings objectives.

This is complicated. It leaves new investors with an uncomfortable decision about which type of ISA is best for them. And, of course, if their savings objectives change, they may need a brand-new ISA, for example a lifetime ISA.

We would like to simplify ISAs into one single product – One ISA. Creating a single solution with a single set of rules, that could be taken out when young, but can develop with the investor, as their priorities and life change. The overall subscription level would be kept at £20,000 a year (less if the account holder is under 18). Money could be taken out without tax or penalty if over 18. And people could choose from a range of investments, including cash and all the current permitted investments under a stocks and shares ISA.

By ending the segregation of cash and stocks and shares ISAs, we can hopefully encourage savers, as they build more savings knowledge and confidence, to graduate from investing only in cash to assets which are more suitable for longer-term saving and building financial resilience.

There would be casualties in this new world. For example, there is no need for an innovative finance ISA. The average ISA holder is not looking for peer-to-peer loans, so it would be easier to lose this additional complication.

But there are other things worth keeping. One of them is a bonus to encourage people to save for a first home.

There is no denying the lifetime ISA bonus is an added complication. But on the other hand it is a popular feature and there are many younger savers out there relying on it to help fund a house deposit.