Treasury urged to focus on simplicity in ISA reform

AJ Bell has been a long-time advocate of radical ISA simplification. UK investors now have six different versions of ISAs to choose from, each with slightly different aims and rules governing them. This creeping complexity risks undermining a product that has proven popular with millions of investors. Combining the best features of the current landscape in a single ‘One ISA’ product would make it much easier for people to engage with the world of investing.

Research among both consumers and advisers supports our view creeping complexity in the rules risks acting as a barrier to sensible investing. While over 70% of Brits are familiar with ISAs, less than half could correctly identify the main types of investment ISA and less than a third know the annual ISA allowance is £20,000.

Half of the individuals surveyed said the different versions of ISAs make them too complicated and that a single ISA product would make them easier to understand.

These findings are echoed among the professional adviser community, with two-thirds (65%) of regulated advisers AJ Bell surveyed agreeing there is unnecessary complexity and over 8 in 10 (84%) backing the concept of having one ISA product that covers the key existing benefits of ISAs.

Addressing this complexity will support wider government efforts to increase the number of people investing for the long-term. Without simplification, there is a danger the battle for engagement will be won by people flogging high-risk, unregulated investments that all-too-often end up being inappropriate or complete scams

Increasing the ISA allowance

Given the ISA allowance has been frozen at its current level of £20,000 since 2017/18, there is an argument that UK savers are long overdue a rise. However, we are sceptical of the benefits of linking any increase in the ISA allowance to an allocation to UK-based investments.

If the goal is improving engagement and making it easier for new investors to understand how ISAs work, adding a new allowance linked to how that person’s money is invested risks further clouding the current picture.

It is also vital investors take a long-term approach to investing based on their risk appetite – and crucially, that they diversify their portfolio. There is a danger in encouraging investing in a specific country that the benefits of diversification will be undermined.