AJ Bell calls for ISA overhaul in radical simplification of UK savings system

• ISAs enjoy strong brand recognition – AJ Bell research shows 96% of UK adults have heard of ISAs, and 71% say they are familiar with them
• However, six different ISA variations are causing confusion as only half of people can identify the main types of ISA, and less than a third know the ISA allowance is £20,000
• AJ Bell proposes consolidating all existing ISA variations into one single ISA solution, making it easier for people to save and invest
• A new flexible ISA bonus could continue to be offered for first house purchases but could also incentivise other behaviours such as funding ‘green’ home improvements, saving for long-term care, and training for specific vocations
• FCA research shows there are nearly 8.6 million consumers holding more than £10,000 of investible assets in cash and has set a target to reduce this by 20%

AJ Bell, one of the UK’s largest investment platforms, today calls for a radical overhaul of the UK ISA system via a new policy paper entitled ‘One ISA – Simplifying ISAs for consumers and encouraging saving’.

In proposals presented to the Chancellor, the business has outlined a system which sees all existing ISAs consolidated into a single ‘One ISA’ product, helping make it easier for people to save and invest while giving policymakers the flexibility to incentivise a wider range of savings goals.

There is a growing savings gap in the UK, as the emphasis for long-term saving shifts from employers and the state to individuals. FCA research shows in May 2022 12.9 million UK adults – one in four (24%) – had low financial resilience, a startling increase of 2.2 million since February 2020[1]. These are people who are in financial difficulty or who could quickly find themselves in difficulty if they suffer a financial shock.

FCA data also shows there are nearly 8.6 million consumers holding more than £10,000 of investible assets in cash and has set itself a target of reducing this number by 20%[2].

New research by AJ Bell shows almost 25 years on from their launch, ISAs have become a recognisable and trusted savings vehicle, with 96% of UK adults saying they have heard of ISAs, and 71% saying they are familiar with them.

Despite strong recognition of ISAs, lack of understanding remains one of the biggest barriers to investing. Only half the people in our research could correctly identify the main types of investment ISA and less than a third know the annual ISA allowance is £20,000. It illustrates the danger that successive government interventions over two decades, leading to the creation of six different ISA variations with their own individual rules, could become a barrier that discourages saving and investing.

AJ Bell has set out proposals for the simplification of ISAs, designed to eradicate complexity before it follows the UK pension tax system, which has become a political football as layers of tax tinkering have been applied by successive governments. 

Creating ‘One ISA’

AJ Bell has set out a blueprint for a single ISA solution encouraging more people to save for their futures. By bringing together the different ISA types but stripping away the unnecessary and unpopular Innovative Finance ISA, the proposal leaves a flagship ‘One ISA’ savings and investment vehicle with a single set of rules.

The new One ISA tax wrapper would provide tax-free growth and income, with a £20,000 annual subscription limit for everyone over the age of 18. One ISA users would be able to hold both cash and investments inside their accounts, with no restrictions on transfers between providers.

Crucially, a flexible bonus system would enable governments to provide a top-up when money in the account is used for a specific purpose. Similar to the existing Lifetime ISA bonus, this could be used to support first-time house buyers, as well as being expanded to provide government tops-ups for other purposes like paying for green home improvements, long-term care or vocational training.

The flexible bonus would give future governments the ability to nimbly implement financial incentives designed to encourage certain savings behaviours, without the need to launch a new ISA product every time it wanted to create a new savings incentive.

Andy Bell, co-founder of AJ Bell, comments:

“The UK needs to act to close the savings gap and ISAs are the perfect product to help people build their financial resilience and prosper in the future. But they are currently too complicated – savers are faced with too much choice. Instead, they need a simple solution to help kickstart their savings.

“The government now has an opportunity to save ISAs from being suffocated by incremental complexity, eradicating the tax and product complexity that could eventually see ISAs turned into a political football in the same way as pensions taxation.

“A One ISA system would help to encourage competition, making it easier for customers to compare just a single type of ISA product and switch between different providers.

“The introduction of a government bonus within Lifetime ISAs has added significant complexity to ISAs and there is a strong argument that removing the bonus and effectively abolishing Lifetime ISAs would make ISAs significantly simpler for consumers and less open to political interference. However, the bonus does provide an incentive to save so if it were retained following ISA simplification, the government should consider making it more flexible and extending its reach.  

“A flexible bonus system would allow the government to implement a range of different incentives, which could be adapted as the needs of the economy change, and which grow and adapt as people’s savings priorities change through life.

“From funding long-term care, to subsidising skills training, or funding green home improvements, the flexible bonus within a single savings product available to everyone in the UK would create a more dynamic savings vehicle fit for the future.”

What would the One ISA look like?

AJ Bell’s proposed rules for the One ISA are: 

Further details of AJ Bell’s proposals can be found in the attached policy paper – ‘One ISA – Simplifying ISAs for consumers and encouraging saving’

1 FCA Financial Lives Survey (October 2022)

2 FCA Consumer Investments: Strategy and Feedback Statement (September 2021)