Last week the Resolution Foundation put forward a radical proposal. The left-leaning thinktank believes the maximum anyone should be able to build up in an ISA is £100,000. 

Its policy experts argued that too little is being saved and invested by low-income households leaving millions with little or no safety net to fall back on. 

But it doesn’t follow that the answer is to curb the tax breaks for today’s savers and investors to fund additional tax incentives for those not currently saving. Robbing Peter to pay Paul is
overly simplistic. 

For starters, the proposal is complicated. The Resolution Foundation suggests no more money be paid into ISAs once the £100,000 threshold is reached, and any returns which exceed £100,000 would be taxed.

It isn’t clear what would happen when the £100,000 is reached either. Will part of the ISA be converted into a dealing account? Or forcibly withdrawn by the account owner? 

The Resolution Foundation also intends for this to apply retrospectively, moving the goalposts for those who have already built up this amount, in good faith.

Secondly, a lifetime limit on ISAs would penalise success. The average annual stocks and shares ISA contribution is £8,875, according to HMRC. Someone investing this amount each year and achieving 6% annual investment growth would hit the £100,000 cap in nine years. Even a more modest annual investment of £5,000 would hit the cap in 13 years.

And those who started investing early would be the most likely to exceed the £100,000 limit thanks to the wonder of compound growth. One of the golden rules of investing is to start as soon as possible, but a cap on ISAs would muddy the waters.

Finally, will this proposal really help anyone? The amount the Treasury could gain from investors with over £100,000 in ISAs will have to be spread very thin amongst the millions of people with no savings.

Put starkly, those who have more money, save. And those who don’t have much can’t afford to, regardless of the incentive on offer. A freedom of information request from AJ Bell revealed that just 2.5% of eligible people have used Help to Save, a scheme with 50% savings bonus for low-income households. Would throwing more money at it to give even bigger tax advantages really help to change behaviour?

Some 12 million people subscribe to an ISA each year. Let’s not ruin the success of a simple and effective policy and punish millions of savers and investors by heaping on unnecessary layers of complexity.

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