ISA simplification doesn’t go far enough for savers

Nine years on from the introduction of Individual Savings Accounts (ISAs) the Government has simplified them, with changes effective from 6 April this year. Whilst these changes are certainly a step in the right direction, Alliance & Leicester Savings believes the Government could go further and is calling for further reform. The Alliance & Leicester Savings proposals are supported by research showing what UK savers really need from the ISA system, from topping up and investment flexibility, to simpler limits.

Although seven out of ten (71%) people now say that they hold some form of savings or investments and more than four in ten savers (43%) have between £2,500 and £100,000 set aside, there is still some way to go before the tax efficient savings vehicles become a staple part of the UK savings portfolio, as just half (51%) use a cash ISA, and only a quarter (27%) hold some of their money in an equity ISA.

Ewan Edwards, Head of Savings at Alliance & Leicester comments: “While the changes due in April this year are certainly steps in the right direction, we believe there are still issues that need to be addressed. ISAs were introduced by the Government in 1999 to encourage people to save for the future and are the primary vehicle for tax-advantaged adult saving outside pensions. The structure must therefore be straightforward enough for the man on the street to digest and for this reason we have developed a three point plan calling for further ISA simplification and flexibility.”

The Alliance & Leicester Savings three point plan for ISA simplification:

Point 1: Simple limits – an easy to remember annual allowance

From 6 April this year you can save up to £7,200 in an ISA, with up to £3,600 in a Cash ISA – nine out of ten people don’t know these limits.

And since most people who have an ISA don’t fund up to the maximum – Alliance & Leicester is asking for a simple, memorable allowance that stays the same for a number of years, so people become familiar with it.

Interestingly, the argument for the new limits of £7,200 in an Equity ISA, of which £3,600 can be held in Cash, is that they are divisible by 12 for greater ease of monthly saving. ISA savers themselves, however, don’t seem to agree, with only 18% of cash and 20% equity ISA holders citing this as an important point.

Point 2: Ability to ‘dip in’ and ‘top up’ during tax year

Under the current rules, you can pay in up to your allowance each tax year – and you can withdraw your funds – but once you take money out, you have lost that part of your allowance forever.

This is a disincentive for people - especially those on a tight budget – preventing them getting the benefit of enhanced returns on their savings and the ability to save up a tax free sum over the years.

Alliance & Leicester is asking for the flexibility during the current year, so that people can pay in / withdraw as much as they like, providing they remain within the tax limits for that year. The Alliance & Leicester Savings ISA study found that half of cash ISA (52%) and equity ISA (47%) savers would like to be able to withdraw and top up (up to the maximum limit) without losing their tax-free benefits.

Point 3: Flexibility – the ability to switch from Cash to Equities AND vice versa

Under the new rules, those with Cash ISAs will be able to transfer their funds into Equities – but not the other way round.

Alliance & Leicester welcomes this new flexibility but also calls for people to have the ability, easily and simply, to transfer some or all of their higher risk stock market investments into a Cash ISA, so they can keep their savings safe in times of market volatility or once they are retired.

More than half of all ISA investors are concerned about their stock market investments (59% of Cash ISA and 53% of equity ISA investors) and plan to review them and possibly make some changes.

Unfortunately, those with equity ISAs are unable to switch their investments into a Cash ISA and protect their capital.

Ewan Edwards, Head of Savings at Alliance & Leicester continues: “Our study indicates that four in ten people (43%) don’t know what the current limit is for Cash ISAs, let alone the ones set to be introduced in the next tax year. And a massive 79% are in the dark about what the maximum limit is for equity ISAs.

“While the take up of ISAs has been positive over the last nine years and is moving in the right direction, it is concerning that studies like ours still find wide-spread confusion about the rules and regulations amongst ISA holders. We feel that more could be done to communicate the basic principles and benefits of ISAs, so that everyone is clear about how they work and how to get the most out of them. Our proposals for further simplification would go some way to making that job easier.”