ISAs are almost 20! Here’s how much income tax you could have saved…
The ISA was introduced close to 20 years ago in April 1999 – an event that should be viewed as a landmark for savers across the UK.
During that period, online investment broker Hargreaves Lansdown estimates that the tax-efficient savings account has attracted close to £8.7trn, resulting in £30bn being saved in income tax alone.
If an individual had utilised their annual ISA allowance since April 1999 and simply invested it in the Legal & General UK Index Tracker, which simply tracks the market, Hargreaves Lansdown notes that £211,320 would have been invested. This would have created a nest egg of £341,982.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, commented: “With an economic Brexit slowdown and tax rises looking likely, it’s never been so important to take advantage of your ISA allowances and protect your savings and investments from tax forever.”
She reflects that ISAs have evolved substantially over the years – with increased allowances, better tax breaks, greater flexibility, a wider range of investment options, the launch of ISAs for children, and ISAs with government bonuses to help people to get onto the property ladder.
“Of course, they’re not perfect. Given how the number of ISAs has expanded over the past few years, they are crying out for streamlining and simplification to help people get to grips with the benefits of ISAs without being confused into paralysis by the proliferation of choice,” she added.
Five ways to improve the ISA
With this in mind, Hargreaves Lansdown has put forward five proposals to improve the ISA in the future:
- Streamline the range of ISAs
A balance needs to be struck between offering choice, and providing so many options that indecision paralyses potential savers and investors. There are two products that can be rolled into existing ISAs while maintaining this balance: Child Trust Funds into Junior ISAs and Help to Buy ISAs into the Lifetime ISA.
- Allow people to subscribe to as many ISAs in a year as they like
The government would need to establish a reporting structure to enable this, but it’s perfectly possible. There are no restrictions on the number of different pensions you can contribute to each year (as long as you stay within the annual allowance) so why restrict the number of ISAs? This would iron out needless confusion – such as the fact you can’t currently put money into a Help to Buy ISA and a cash ISA in the same year.
- Allow ISAs to be passed on free of inheritance tax
Pensions can be passed on tax-free after your death, but ISAs are potentially subject to inheritance tax. This could distort the way people view their retirement finances, and put them off saving into an ISA alongside their pension to create a valuable tax-free source of funds in retirement. Making both free of inheritance tax would level the playing field.
- Cut the LISA withdrawal penalty to 20%
If you take cash out of the Lifetime ISA before the age of 60 – for any reason other than to buy your first property – you face a penalty of 25%. This doesn’t just remove the government bonus, but takes a chunk of the money you have invested too (£6.25 of every £100). Cutting the penalty to 20% would mean you effectively just lose the bonus (and any growth on it) if you need the money for something else.
- Completely separate ISA allowances
The sharing of the LISA and ISA allowance is the single biggest cause of confusion among people who are considering a LISA, and creates administrative complexity for savers and providers. Separating the two allowances would solve this at a stroke.
The evolution of the ISA allowance
Here’s how the ISA allowance has changed over the past 20 years…
|Year||ISA Allowance||JISA allowance|
|1999/2000 – 2007/2008||£7,000||N/A|
|2009/2010||£7,200 under 50s, £10,200 50 and over||N/A|
|2014/2015||£11,880 and from 1 July £15,000||£3,840 and from 1 July £4,000|
Source: Hargreaves Lansdown