Hunt will seek to address getting UK savers to stop hoarding cash and making it easier for them to shift that into UK-domiciled stocks. Just as important will be the opposition Labour party’s response to any changes, as it’s the firm favorite to form the next government. Be prepared for an altered landscape. There just might be some common ground though.
First and foremost is to get consumers to see the flagship non-pension investment vehicle – Individual Savings Accounts (ISAs) – as more than simply a tax-advantaged depositary. Government and regulators alike have frequently expressed their frustration that so many people view cash ISAs as long-term investments. While cash is indeed a suitable vehicle for short-term savings, many of Britain’s least sophisticated investors are missing out on the opportunity to build wealth by not taking some stock market risk.
Secondly, both the Conservative and Labour parties have been covetously eyeing pension savings as a means of boosting investment in British industry. Being pragmatic, it would be easier to Make UK Great Again by improving ISAs, than by twisting the arms of more sophisticated pension investors. As much as three-quarters of the £800 billion ($1 trillion) invested currently in ISAs languishes unproductively in cash. What form these changes take is a matter of conjecture but increasing the annual £20,000 limit — if placed in UK equities — is a red-hot favorite.
Additionally, while it is possible to switch from a cash ISA into stocks, few bother. So expect measures to either make switching easier, or simply to allow investors to more easily comingle cash and stocks in the same account rather than having separate pots for each tax year.
The third issue is considerably more complex. Over and above the confusing array of products, ISAs also stack up poorly compared to pensions. Recent rule changes have increased the attractiveness of pensions and raised the annual allowance to £60,000 from £40,000, while scrapping the lifetime limit on contributions. Added to which, pension pots can currently be passed on free of inheritance tax, making them attractive estate management vehicles for wealthier individuals. This last point is almost certainly something that the Labour party will seek to address if elected.
What is clear, is that an overhaul of the investment products available to the British public is long overdue. When the ISA was introduced in 1999, it was intended to tidy up a bewildering array of tax-advantaged vehicles. Instead, it has morphed into a Frankenstein’s monster. There are cash-only variants, or those just for stocks and shares, innovative finance vehicles, lifetime programs for under-40s to promote home ownership and even a Junior ISA, to help children catch the saving bug. As such, ISAs offer neither the simplicity investors crave, nor do they help to achieve the government’s policy objectives.
The balance that Hunt and his likely Labour successor must strike, is that there is only so much money individual investors have to squirrel away — and making pensions more attractive has only disincentivized other savings avenues. This is known as the law of unintended consequences.
If the intent is to foster a broader investment culture, reform to basic products such as ISAs and pensions must be viewed in the context of the incentives already available to wealthier investors. After utilizing their ISA and pension allowances, these super-high earners often turn to venture capital, which is directed at precisely the higher-risk startups and early-stage companies that both parties are keen to promote. Higher ISA limits could divert cash away from the potential stars of the future.
While there are clearly tricky decisions to be made by policymakers, things might be a little more straightforward for investors. The tide is likely to turn against pensions and toward ISAs. That being the case, if you have plans to take advantage of recent improvements to pensions, it is probably best to do so sooner rather than later.
More From Bloomberg Opinion:
• How British Savers Can Avoid Getting Ripped Off: Stuart Trow
• The Obvious Way Sunak Can Fix Inheritance Tax: Merryn S Webb
• Record UK Wage Growth Isn’t as Hot as It Seems: Marcus Ashworth
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.
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