One of the reasons why we’re currently mid-way through a populist crisis is that many ordinary folk find the whims and fancies of policymakers confusing and impenetrable. Politicians come up with clever sound bites which resonate on the mass media but then policymakers and regulators complicate matters and confuse the end customer/citizen. The pension regime is a classic example of this – the idea of a well-funded pensions system makes absolute sense but the net effect of all the regulatory confusion and endless acronyms is that many savers avoid starting a plan because they genuinely have no idea of where to start.
The humble ISA was always meant to be different. Here was a simple idea that was meant to be easy to understand. Everyone has a pot of money into which they can stash cash away from the taxman. It was a great policy success and a superb idea.
Sadly, its now in danger of being over complicated with endless variations of the ISA utterly confusing investors. A study out this week nicely backs up this worrying conclusion. It’s a survey of 1,000 UK adults, carried out by Oaksmore ISA (an FCA-regulated Alternative Investment Fund Manager) – as part of the 2018 British Heritage Restoration Report .
This shows that despite 61% of UK adults having savings of over £1,000, almost 1 in 4 (22%) are reluctant to invest their personal savings. Instead, these funds often remain in ordinary bank accounts attracting little or no interest. Other findings include the following:
- almost 1 in 5 (16%) savers were not aware of any type of ISA.
- Even though 75% are aware of traditional cash ISAs, much fewer people have any knowledge of any other types of these investment products.
- less than half (40%) were familiar with stocks and shares ISAs
- under 1 in 3 (31%) are familiar with Help to Buy ISAs and
- less than a quarter (24%) are acquainted with lifetime ISAs.
- When it comes to Innovative Finance (IF) ISAs – an ISA that contains peer-to-peer loans instead of cash – just 6% of the population were aware that this was an option
These numbers tally with my own conversations with investors. Everyone thinks the ISA WAS a good idea but not one person I’ve talked to has given me a definitive explanation of all the different ISAs. Crucially knowledge of the new ISAs like the Lifetime one and the IFISA is next to non-existent.
I’d argue this depressing state of affairs really, really matters. History teaches us that well-intentioned policies at first succeed but are then complicated by policymakers. This creates confusion, which eventually results in apathy and usage of said policy starts to decline – as consumers and citizens use the cover of ignorance to justify lethargy and inaction. As usage declines, especially amongst mainstream citizens, the policy comes to be seen as a tool for the ‘switched on’ and thus a bit of an unfair subsidy for those who don’t need it. At this point, critics swarm and the policy is itself called into question – not least by a Treasury that is always looking to close a loophole or find a way to levy increased taxes.
My hunch is that over time the ISA will become a major target for the authorities. In the first stage, we’ll see tax subsidies to pensions cut back which will in turn prompt more sophisticated investors to use ISAs as an alternative for long-term planning. As the capital lump sums grow inexorably we’ll hear more and more about ISA millionaires sheltering their capital from the taxpayer. This will, in turn, tempt policymakers to attack the ISA ‘reserve’, maybe via retrospective taxation to help fill the hole in the NHS/Defense/Policing. New capital and wealth taxes are coming and the ISA will be on the front line.