Media reports over the weekend suggest the Treasury is planning reforms to the ISA system, with ideas ranging from merging the key features of existing ISAs in a single ‘One ISA’ product, to hiking the available allowance for those who invest in companies listed on the London Stock Exchange (LSE).

Current ISA rules mean every adult in the UK can save up to £20,000 in an ISA each year with the returns paid tax-free. There are several types of account including cash ISAs, stocks and shares ISAs, Innovative Finance ISAs, and Lifetime ISAs. Parents can save for children in a Junior ISA which has a £9,000 a year limit.

The current system is often criticised for being too complicated. For example, Lifetime ISAs can only be opened by people between the ages of 18 and 40. Up to £4,000 a year can be saved in a Lifetime ISA, with the Government adding a 25% bonus. But the money from these accounts must be used to buy a first home or to fund retirement.

The ISA allowance has been frozen at its current level of £20,000 since 2017/18, meaning there is an argument that UK savers are long overdue a rise.

Time to simplify the ISA

AJ Bell published a policy paper in April this year kicking off a wide debate about the future of ISAs. In the paper, the investment firm set out how a ‘One ISA’ product could be created and the potential benefits to consumers.

Meanwhile, Financial Conduct Authority (FCA) data shows there are nearly 8.6 million consumers holding more than £10,000 of investible assets in cash and the regulator has set itself a target of reducing this number by 20%.

Tom Selby, head of retirement policy at AJ Bell, said: “AJ Bell has been a long-time advocate of radical ISA simplification. UK investors now have six different versions of ISAs to choose from, each with slightly different aims and rules governing them. This creeping complexity risks undermining a product that has proven popular with millions of investors. Combining the best features of the current landscape in a single ‘One ISA’ product would make it much easier for people to engage with the world of investing.

“Research among both consumers and advisers supports our view creeping complexity in the rules risks acting as a barrier to sensible investing. While over 70% of Brits are familiar with ISAs, less than half could correctly identify the main types of investment ISA and less than a third know the annual ISA allowance is £20,000.

“Half of the individuals surveyed said the different versions of ISAs make them too complicated and that a single ISA product would make them easier to understand.”