Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The UK government’s plans to shake up the Isa market, aimed at encouraging savers to switch more money from tax-free cash into stocks, could become “a sting in the tail” causing retail investors to “shun markets”.
Three-quarters of UK retail investors rejected changes to existing rules with nearly two-thirds using them to shield dividends, interest and capital gains from tax, according to a YouGov survey commissioned by investment platform Freetrade.
“As an industry we’re at risk of forgetting to listen to current and prospective retail investors in all this noise about Isa reform,” said Viktor Nebehaj, chief executive of Freetrade.
“Potential changes that add complexity could end up with a sting in the tail, turning prospective investors away from global markets and even encouraging those currently invested to shun markets.”
The government’s move could pave the way for one of the biggest shake-ups of the Isa market since its creation in 1999 in the wake of calls by some big City groups to cap the amount held in tax-free cash.
There are four main Isa products, including the cash Isa, which is by far the most popular product, holding £300bn of savings. Isas allow individuals to save and invest up to £20,000 a year free of income and capital gains tax.
However, some industry groups, such as Fidelity International and investment platform AJ Bell, have called for a simpler system for investors, to lure consumers away from cash savings.
Research by Fidelity International found that 40 per cent of consumers would prefer a simplified single product.
“Whilst Isa products, particularly cash Isas, are well used by consumers, we believe the entire UK Isa regime should be reviewed with the aim of simplifying it,” said James Carter, head of platform product policy at Fidelity International.
“The complexity destroys confidence, leaving many individuals missing out on vital opportunities to strengthen both their short and long-term financial position.”
AJ Bell chief executive Mike Summersgill agreed, saying “simplifying the road map” could encourage consumers to invest.
“Isa are incredibly popular, but political tinkering means a patchwork quilt of products has been stitched together over time. Faced with excess complexity, people often choose the path of least resistance, in the form of cash saving.”
Ideas for reform, such as eliminating stamp duty or combining Isa products, have attracted little support. Only 11 per cent of respondents were in favour, according to the YouGov poll.
While overall appetite for reform remains low, 40 per cent of respondents said they would invest more if the Isa tax-free allowance was increased.
Other potential changes include skewing tax breaks towards UK-listed stocks, with the introduction of a UK Isa as well as a review of Lifetime Isas, which help people save for their first home or later life, with options including changes to withdrawal penalties.
However, only 16 per cent of investors would invest more if a UK Isa was introduced, YouGov found.
Others viewed investing in markets as too much of a risk, despite rises in inflation, with nearly 30 per cent likening it to “gambling”. Nearly 10 per cent viewed cash savings as safer.
YouGov interviewed 2,010 UK adults with more than £10,000 in investible assets and a self-invested personal pension, share Isa or non-Isa investment holdings between May 23 and 28.
