- Emma Reynolds, Economic Secretary to the Treasury, reaffirmed that wholesale ISA reform is on the cards ahead of the Autumn Budget while giving evidence on the future of the Lifetime ISA to the Treasury Committee
- The exact nature of reforms was not disclosed but all options, including AJ Bell proposals for a single ‘One ISA’ product, appear to be on the table as government looks to foster a culture of retail investing in the UK
- But changes to the punitive Lifetime ISA ‘unauthorised’ withdrawal charge and maximum property price limit are seemingly low on the government’s list of priorities
- AJ Bell has repeatedly urged government to simplify the complex ISA system for the benefit of consumers by:
- Radically simplifying the upfront choice available to investors, initially by merging Cash ISAs and Stocks and Shares ISAs into a single main ISA product
- Introducing improved help for savers and investors through ‘Targeted Support’ reforms
- Removing the disincentive to invest in UK Plc by scrapping stamp duty on UK shares bought through ISAs – a reform which would cost around £120 million
AJ Bell director of public policy, Tom Selby, comments:
“If there was any doubt that Labour remains committed to implementing substantive ISA reform, those doubts can surely now be cast aside. Economic Secretary to the Treasury, Emma Reynolds, today reaffirmed the government’s intention to consider all options when it comes to reforming the ISA landscape, including revamping the Lifetime ISA.
“But she refused to be drawn into committing to timescales, only saying there was one fiscal event scheduled for this year, the Autumn Budget, and that changes could be introduced next tax year. She was also keen not to give anything away on detail, such as whether government was considering a lower Cash ISA subscription level or a UK investing mandate, instead saying she didn’t want to add to speculation about what government might or might not do.
“It is clear Reynolds wants to shift money out of cash savings and into equity investing, citing AJ Bell research that someone putting away about £1,000 in an average-performing Cash ISA every April over the last 25 years would have built up £34,000, around £49,000 less than someone who had saved in a Stocks and Shares ISA and invested in an average IA Global Sector fund over the same period.
“It was disappointing that although promising to keep all options open, lowering the punitive 25% early withdrawal charge on Lifetime ISAs seems low on her priority list. Charges should reclaim any government bonus, but taking away an additional 6.25% of the individual’s own investment is harsh, especially as people don’t plan these withdrawals, but end up doing so because life doesn’t always go according to the script.
“Reynolds may have kept us guessing on the detail of the reforms under consideration and the timing of any announcement, but this was as clear a sign as any that ISA reform is coming. The odds on a new ISA regime being introduced from April 2026 certainly shortened today.”
AJ Bell’s blueprint for ISA reform: better help for investors, simplification and a genuine incentive to invest in the UK
“AJ Bell has long been urging for simplification of the ISA system and welcomes the government’s openness on the various ways this could be achieved. If Reeves is serious about fostering a retail investing revolution as well as making sure consumers have the confidence to invest for the long term, we propose a package of straightforward reforms that could bring us a step closer to the chancellor’s aims.
“First, the government must press ahead with proposals which will enable financial services firms to give customers more useful nudges about their finances through ‘Targeted Support’. This will enable millions of people to make better-informed decisions about their finances, including investing for the first time or transitioning from cash to investing. The prize here is significant – AJ Bell’s analysis of HMRC figures suggest around £100 billion of money is held by people with £20,000 or more in Cash ISAs who have not invested a penny in Stocks and Shares ISAs*. Some will have sensible reasons for only saving in cash, such as building up a rainy day pot for emergencies, but it’s likely many others have a longer-term time horizon and should consider reaping the rewards of investing.
“Second, to support the introduction of Targeted Support, government should undertake a thoughtful review of the ISA landscape, with a clear focus on simplification and boosting retail investing. Part of the reason for the success of ISAs since they were created in 1999 has been their simplicity. Interventions by successive governments have chipped away at this and there are currently six different versions of ISAs in the UK, with different limits and rules applying to each version of the product. Furthermore, having a separate product for those saving in ‘Cash’ and an entirely different one for those investing in ‘Stocks and Shares’ creates an unnecessary barrier – namely the necessity to open a new account to invest for the long term. Combining Cash ISAs and Stocks and Shares ISAs into a single main ISA product would make it simpler for people to transition from the former to the latter, and in the process reduce the upfront choice complexity which we know puts people off.
“As a final cherry on the cake, Reeves should review the impact of stamp duty on UK shares – a tax which explicitly disincentivises investment in British companies at a time when government policy is aimed at doing precisely the opposite. While the multi-billion-pound annual cost of scrapping stamp duty across the board might make the chancellor wince, creating a specific carve-out for ISAs to support her retail investing drive could be achieved at a fraction of this cost – we estimate somewhere in the region of £120 million**. In government spending terms, that is pretty much a rounding error and would remove a nonsensical barrier to ISA investors buying shares in UK businesses.”
*Source: ISAs unpacked: who holds them and how much do they have? | AJ Bell
**Estimate based on analysis of total stamp duty paid by AJ Bell customers over the last 12 months, extrapolated across all UK ISA accounts.
