If a bald patch has appeared in my otherwise lustrous locks, it’s because the Budget has left me scratching my head.
Playing second fiddle to the Chancellor of the Exchequer’s headline-grabbing decision to knock another 2p off National Insurance came news of the ‘British ISA’.
Or, possibly, the ‘UK ISA’ (you can read the details here).
Given that the Right Honourable Member of Parliament for South West Surrey, Jeremy Hunt, and the department that he heads up, HM Treasury, used the monickers interchangeably, it’s tricky to know which term to use.
Hardly an auspicious start for a newly proposed addition to the UK’s already fulsome family of Individual Savings Accounts (have a bonus point if you can name them all).
Imagine VW announcing that the latest addition to its electric vehicle range was called the Solarium – or possibly, the Windmill.
But I digress. On the plus side, any proposal that lifts, by £5,000, the annual amount that can be channelled into these relatively popular, tax-efficient savings and investment products is to be welcomed.
The ISA allowance has been set in aspic at £20,000 since 2017. Just accounting for inflation alone in the intervening period, the level ought to be around the £25,440 mark today.
Add in a couple of pernicious reductions to capital gains tax and share dividend allowances that kick in from the start of the new tax year in April, and any assistance for investors looking to hold on to as much of their money as possible is not to be sniffed at.
The bigger question, however, is whether we need a British ISA at all. The investment industry, not normally one to turn down a gilt-edged invitation to promote and flog new products, has not exactly been whooping with joy at the news.
The government’s thinking, to be found in the literature attached to the consultation that runs until June, is for the British ISA to “support a culture of investment in the UK and to give people the opportunity to invest and benefit from the UK’s vibrant capital markets and high-growth companies”.
In other words, it hopes to encourage more retail investors to divert their money into UK plc, a sector that has been woefully devoid of investment capital in recent years.
Just this week, the Investment Association reported that the UK All Companies funds sector, haemorrhaged £10.2 billion in 2023, part of a £24.3 billion total net outflow of investment funds of all shades over the past 12 months.
According to the government’s own savings statistics, 11.8 million adult ISA accounts were taken out in 2021-2022. The same year, the average amount invested in stocks and shares ISAs was about £8,700.
The figures also showed that only 15% of ISA subscribers saved the maximum £20,000 available. The proportion rose to 39% for those with an income between £100,000 and £149,999 and further still, to 61%, for those earning £150,000-plus.
Put another way, and as Michael Summersgill, chief executive of investing platform AJ Bell, summed up: “A tiny minority of people max out their ISA allowance each year”.
The British ISA already smacks, therefore, of appealing solely to the well-heeled – not a good look.
Another puzzling aspect of the government’s proposal arises when you consider which investments will actually be allowed in a British ISA when it eventually appears.
To offer a potential guide, the government’s consultation document references the Personal Equity Plan, or PEP, a forerunner to the ISA that was introduced in 1986.
Following this line of reasoning, company shares would be allowed. Applying old PEP rules, the new format would likely define “eligible UK companies” as ordinary shares in companies that are incorporated in the UK and are either listed via the UK stock exchange or are traded on it.
Opting for that route, however, would fail to take account of the extent that a company’s commercial activities actually took place in the UK. FTSE 100 mining stocks, for example, are London-listed, but literally carry out their business at the coal face in locations spread around the globe.
PEPs also permitted investment in unit trusts and investment trusts if three-quarters or more of the value of the holdings of the fund in question were invested in eligible UK companies.
Yet investment trusts, which operate in the same way as UK shares, were not mentioned specifically in the latest consultation document.
One can only imagine the rumpus if funds were not included at all in the British ISA. The accusation levelled at the government then would be that nudging retail investors towards direct stock holdings over equity funds is foolhardy because of the diversification that funds provide.
If what’s to be permitted within a British ISA remains unclear, an even bigger headache could lie in store for those actually administering these products.
But don’t take my word for it. On hearing that British ISAs had received the green light, I immediately contacted the boss of a nationwide firm of financial advisors to ask for his reaction to the news.
His response was not exactly encouraging: “The British ISA could get caught up in an awful tangle of rules. For example, without some kind of exit penalty regime, what would stop me from putting my £5,000 allocation into, say, UK equities, only to transfer them immediately into a more diversified investment?
“Penalties, transfers and the like add complexity. They put off potential investors, rather than encourage them.”
If that leading advisor remained unimpressed, what about the investment industry itself?
Investment firms will be the very businesses vested with getting British ISAs off the ground. But in much the same way that the Lifetime ISA has experienced more of a trickle than a flood of interest from product providers since being introduced (there are only about 20), I can see British ISAs suffering from a similar, lukewarm reception.
In tandem with plenty of other commentators from the City and beyond, I suggest that if the Chancellor really wanted to stir investors’ juices, he’d have been better off cutting stamp duty on share transactions.
What the public received instead was a politically-motivated gimmick instead of a carefully crafted strategy designed to spur retail investors into action, while helping to reinvigorate the prospects of UK companies.
