A new government with a fresh mandate post-election will have a huge opportunity to deliver lasting reforms for the benefit of savers and investors. The fact both Labour and the Conservatives have committed to ISA simplification is a huge positive, but to deliver genuine benefits to millions of Brits the next administration needs to be radical.
AJ Bell has long campaigned for the ISA landscape to be simplified by combining the best features of the existing six types into a single ‘One ISA’. As a first step, the next government should look at merging Cash and Stocks and Shares ISAs, the two main ISA products used by investors.
This move would make it simpler for investors to shift between cash and investments and move us towards a world where investments are simply a feature of ISAs, rather than a defining characteristic. Platforms could then build a more flexible ISA with the ability to move freely between cash and investments – something which would tie in with wider efforts to boost the number of people investing for the long term, including in UK Plc.
As part of this review of ISAs, policymakers should also consider super charging the Lifetime ISA by scrapping the exit penalty and increasing the minimum property limit from £450,000.
Ditching the British ISA
“While the aim of the British ISA proposed by the current government – namely boosting capital markets and ultimately the UK economy – is laudable, it was always doomed to fail in that objective. The timing of the announcement of the general election, which came before the formal consultation had closed, will hopefully mean it never sees the light of day. The absolute maximum that could have flowed to UK Plc as a result of the British ISA was around £4 billion a year, which might sound like a lot but in the context of a £2 trillion stock market is a pittance.
What’s more, behavioural adjustments would likely have significantly neutered its impact, while over the long term the added complexity created would inevitably have put potential investors off ISAs. Increasing the overall ISA allowance to £25,000 would likely deliver a similar boost to UK Plc, without layering on unwelcome complexity.
The new government needs to take a sensible, saver-focused approach to ISA reform, starting with ISA simplification. No sensible policymaker starting from scratch would advocate for six different types of ISA. Consumers are overwhelmed by choice.
Scrapping the British ISA does not mean government cannot support UK capital markets. There are alternatives to the British ISA – such as scrapping stamp duty or inheritance tax on UK investments – that could prove to be compelling incentives to invest in UK companies and funds. The UK has one of the most punishing levies on share transactions in the world. Our peers in the US and Germany charge nothing, making it cheaper for UK investors to buy shares in Boeing or BMW than BT and Barclays.
Keep pensions simple
Pensions too are bedevilled by complexity, particularly when it comes to the tax rules. The current government deserves credit for increasing pensions annual allowances and scrapping the lifetime allowance altogether, a move which puts retirement savers first and eases the pressure on the public sector, including the NHS, which had seen thousands of senior consultants quit for fear of being hit with a massive pension tax charge.
Labour’s plan to introduce a new lifetime allowance would be a retrograde step, adding unwelcome complexity and punishing savers who enjoy strong investment growth. Creating a disincentive to investing, including in the UK, also runs entirely counter to the Mansion House agenda, which both Labour and the Conservatives have supported.
The next government needs to put pensions tax simplicity front-and-centre of their policy agenda. Over the longer term, there is an argument for reviewing the various different allowances that currently exist, with the aim of streamlining and encouraging more people to save for retirement.
This should not, however, include creating a flat rate of pension tax relief, an idea often floated around election time with little explanation of the practicalities, particularly in relation to defined benefit schemes. Scrapping higher-rate pension tax relief would inevitably require a big tax charge to be levied on tens of thousands of defined benefit members, including those in the NHS. This feels like the last thing any incoming government would want to do given the strains on public services at the moment.
Improving the help available to savers and investors
Making ISAs and pensions easy to understand is just part of the challenge – it is also vital to improve the help available to people, both by improving guidance and encouraging more people to take regulated financial advice.
The Advice Guidance Boundary Review initiated by the Treasury and the FCA, in particular proposals to enable more personalised ‘Targeted Support’ guidance, has the potential to be a game-changer. More useful guidance, higher take-up of regulated advice and simpler products could provide the foundation for a saving and investing revolution in the UK.
The fact both the current government and Labour support the Advice Guidance Boundary Review is extremely encouraging and should mean that, regardless of the outcome of the general election, these plans are pushed through without serious delay.
Connecting people with misplaced pension pots
Automatic enrolment has been a success story so far, dramatically boosting the number of people saving for retirement. Those reforms require an upgrade to boost minimum contributions post-election, but there is also the mounting issue of ‘lost’ pension pots to tackle.
Around £27 billion of retirement money is estimated to be ‘lost’ in the UK, in part because each job move can create a new auto-enrolment pension pot. Reforms to create pensions dashboards, which will allow people to see all their retirement pots in one place, should make a big difference in this regard.
The timetable has been delayed multiple times, so it is crucial the next government, whoever it may be, presses ahead with the introduction of dashboards as planned.
In the meantime, anyone who needs to find pensions from previous employers can try AJ Bell’s free pension finder tool, which can take the hard work out of tracking down old pensions. AJ Bell has also created a simple, value-for-money Ready-made pension to take the hassle out of combining your pensions.
Tackling tax troubles
Over a decade on from former chancellor George Osborne’s bombshell pension freedoms announcement at the March 2014 Budget and the tax system which governs flexible retirement withdrawals remains faulty.
The latest official figures reveal over £1.2 billion has now been repaid to savers who were overtaxed on their first withdrawal and filled out the relevant HMRC form to claim their money back. In the 2023/24 tax year alone, a record £198 million was repaid to people who had been clobbered with an unfair – and often unexpected – tax bill.
Depressingly, the true over-taxation number will likely be substantially higher. In particular, people on lower incomes who are less familiar with the self-assessment process might be less likely to go through the official process of reclaiming the money they are owed. As a result, they will be reliant on HMRC putting their affairs in order.
It is simply unacceptable that the government has failed to adapt the tax system to cope with the fact Brits are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days. The new government needs to urgently review this approach and deliver a solution which taxes withdrawals correctly.
More broadly, HMRC desperately needs some serious investment. A recent National Audit Office (NAO) report revealed taxpayers spent an astonishing 798 years on hold to HMRC in the 2022/23 tax year, and the situation is likely to become even more strained as frozen thresholds and cuts to dividend and capital gains tax allowances drag more people into the taxman’s clutches.
HMRC’s burgeoning waiting room is down to both the growing number of taxpayers needing help navigating the UK’s labyrinthine tax system and longer hold times waiting to speak to someone. A freedom of information request by AJ Bell shows that the average wait time to talk to someone at the tax office has quadrupled in a decade, from 4 minutes in 2012/13, to well over 16 minutes in 2022/23.
Waiting times have absolutely soared in the last few years. In 2019/20 the typical wait time was 6-7 minutes, but the average hold time taxpayers have to endure has rocketed since then. Of course, many will have waited far longer if they had to contact the taxman at peak times.
HMRC’s own performance statistics showed a record number of calls last tax year, despite phone lines having been shut over the summer months. There was also a significant uptick in use of its webchat and digital services. The new government will face difficult choices with regards to how it spends limited resources, but ensuring the tax office is fit-for-purpose must be a priority.
Disclaimer: The value of investments can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future performance and some investments need to be held for the long term. Tax treatment depends on your individual circumstances and rules may change. Pension and ISA rules apply. These articles are for information purposes only and are not a personal recommendation or advice.