This week we extol the virtues of ISAs. For the last quarter of a century or so, these products have allowed savers and investors to shield their cash from HMRC and avoid having to fill out complicated paperwork at the end of the tax year.

As of the end of the 2022/23 tax year, Britons had squirreled away more than £725 billion in these vehicles making them among the most successful UK government innovations on record.

In some ways ISAs, and particularly the core stock and shares and cash iterations, have faced less tinkering than other areas like pensions, with the £20,000 annual allowance unchanged since April 2017.

While this limit hasn’t been increased in line with inflation, it still feels pretty generous given most of us would struggle to put away more than this sum in a single year, particularly if we’re already making contributions to our pension.

Nonetheless, there are probably unnecessary levels of complexity in the broader ISA set-up as it stands today. Addressing these seems more urgent than cutting the cash ISA limit, as the Government is rumoured to be considering, partly as a way of encouraging more people to invest their money.

AJ Bell has put forward some pretty sensible ideas on how the ISA universe could be simplified and made more user-friendly in a policy paper issued last summer. It has already played a part in seeing off the idea of a British ISA, but merging the cash and stocks and shares, Junior and Innovative Finance ISAs into a single product, as the investment platform has suggested, might be a better way to encourage more people to put funds to work in the market without reducing the generosity of the cash limit.

This wouldn’t mean existing providers of cash ISAs would suddenly have to start offering the ability to buy equities, merely that it would be up to said provider which options they provided within the universe of eligible investments. As AJ Bell points out, we don’t distinguish between cash and stocks and shares pensions, for example.

Also, not overtly penalising people for making withdrawals from a Lifetime ISA which are not for retirement, due to a terminal illness or to buy a first home seems a reasonable reform.

It’s fine for the state to claw back the free cash it has doled out, but that would be achieved by applying a 20% exit charge (as it did during Covid) rather than the current 25% which leaves someone with less money than they started with.

In our main article in this issue, we discuss how to start or restart your ISA investment journey step by step. Read on to discover more and get the latest on the sell-off in the US market.

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine.The author (Tom Sieber) and editor (Ian Conway) of this article own shares in AJ Bell.

‹ Previous2025-03-13Next ›