Gareth James: Make ISAs simple again

As the ISA market developed as did its complexity, writes Gareth James. Here, he explains why it is time to go back to basics when it comes to tax-free saving

If you were asked to name one factor that increases engagement with retirement saving what would you choose? To me, the choice is simple, simplicity.

If savers find the options available to them complex, engagement very quickly drains away.

The two big pensions success stories of the last few years, at least in the eyes of savers, have been auto-enrolment and the pensions freedoms.

Auto-enrolment has made joining a pension scheme simpler than not joining one.

As a result, the numbers who are active members of a pension scheme has rocketed.

The pensions freedoms have made withdrawing funds appear much simpler than had previously been the case, deceptively (and arguably too) simple when you consider the temptation to access those funds and the risks of lack of sustainability.

Simpler times

Prior to the introduction of auto-enrolment and more recently the pensions freedoms, if people had been asked whether saving in a pension or an ISA was simpler, most would have chosen the latter.

For many years this was borne out by the statistics of those subscribing to ISAs when compared to the number making personal contributions to self-invested personal pensions (SIPPs).

From the turn of the millennium, the trend for ISAs was increasing engagement while the trend for pensions was downwards. The peak for ISAs came in 2010/11 with over 15.2 million accounts subscribed to. The personal pensions trough came a year later with only 5.3 million individuals contributing.

Since then, the trend has been reversed. In 2016/17 only 11 million ISAs were subscribed to, a drop of 27% from the peak. Meanwhile, pensions engagement has shot up with almost nine million individuals contributing to a pension in 2015/16, an increase of 68%.

A number of factors will have played a part, but I can’t help believing that a significant contributory factor has been an increase in the complexity of ISAs.

We’re a long way removed from a position where savers had a choice of cash or stocks and shares. In addition to those two options, savers now have to contend with Innovative Finance, Help to Buy and Lifetime ISAs. Add in Junior ISAs for younger savers and the introduction of Flexible ISA rules and we begin to see why some are confused.

AJ Bell has been calling for a return of simplicity in the ISA framework for some time.

Bright idea

So it was interesting to see recent proposals from the Association of Accounting Technicians (AAT) for the Everything ISA. Thankfully not a proposal for yet another type of ISA, but instead is a call to bring most of the current ISA options under a single set of rules.

Some of the detail of the AAT’s proposal had me scratching my head – I’m sure the Treasury would baulk at the complete removal of annual savings limits, while many involved in pensions would do the same at the suggested introduction of a lifetime savings limit of £1m – but the basic premise feels sound.

If the government is interested in reversing the downward trend of numbers saving into an ISA, rather than introducing new variants in an attempt to engage particular population cohorts, they’ll potentially have more success by going back to basics with a single, simple ISA.

Gareth James is head of technical resources at AJ Bell