As we approach the end of the 23/24 tax-year, we also reach a significant milestone: 25-years of the Individual Savings Account (ISA).
With imminent changes and updates coming to one of the most used savings and investing accounts in the UK, now feels like a good time to take a step back to explore its origins and various iterations before examining its future.
So where does the ISA come from?
The ISA was introduced in 1999 by Gordon Brown to replace the Personal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs). However, their inception was met with mixed reactions.
Investors, commentators, investment companies, and financial advisers were sceptical. The bone of contention was that ISA investment limits seemed less favourable compared to those that applied to PEPs (for investment) and TESSAs (for cash). The more modest ISA limit of up to £7,000 (with £3,000 as the cash element) was seen as an ‘attack’ on the savings industry.
Since then, the ISA has gone through various rounds of tweaks and changes to become a stalwart of the financial planning process, undoubtably helping millions to save and invest.
Below is a summary of some of the key ISA milestones:
- 1999: ISAs were born, replacing PEPs and TESSAs. The annual allowance was set at £7,000 per tax year.
- 2008/09: The first change to the existing limit occurred, increasing the allowance by £600 per year.
- 2013: The government allowed ISAs to hold shares listed on the Alternative Investment Market (AIM). This move opened investment opportunities in smaller, growth-oriented companies. Additionally, ISAs became eligible for Business Relief (BR), which provides inheritance tax (IHT) planning benefits. Investors could now include AIM-listed shares within their ISAs, potentially shielding them from IHT.
- 2014: The government introduced the concept of New ISAs (NISAs), which combined both cash and stocks and shares ISAs. The annual allowance for NISAs was set at £15,000. This marked a simplification of the ISA landscape, making it easier for savers to manage their investments.
- 2017: The NISA allowance underwent another transformation, expanding to £20,000 per tax year. Savers could now contribute up to this higher limit across cash, stocks and shares, and innovative finance ISAs. The flexibility offered by the increased allowance encouraged more people to participate in ISAs.
As of the end of the 21/22 tax-year, £741.6 billion was held in ISA accounts with 62% of that held in stocks and shares. This proves that ISAs have been a successful tool for individual savers and investors to grow and preserve their wealth tax efficiently. But what is in store for ISAs moving forward?
The Future of ISAs: some considerations
- Digital transformation: ISAs have become more accessible and user-friendly through digital platforms. Nutmeg and Moneybox for example have engaged use of ISAs as the main account type, with options to focus on individual objectives, such as saving for a house. This engagement provides an opportunity to build on.
- Expanded investment options: Broader investment choices within ISAs are also on the rise, including sustainable and ethical funds, as managers seek to engage with new customers through thematic investing opportunities.
- Innovative products: New ISA variants have already emerged with the LISA and JISA, but what other audiences could the ISA be used for?
- Tax efficiency: Focus on tax efficiency as a key driver for ISA usage will remain at the core of the proposition though allowances and tax-exemptions may change as new governments look to have their say on the UK saving and investing environment.
There are two specific changes already in motion and coming to ISAs on the 6 April to be aware of:
1. Multiple ISA subscriptions
At the moment you can only subscribe to one ISA of each type per tax year. However, starting from April 2024, clients will be able to pay into multiple ISAs of the same type within the same tax year.
This change simplifies things for both cash savers and investors. Cash savers can open multiple new cash ISAs as better interest rate deals become available. Investors can more easily try out different stocks and shares ISA providers making the environment even more competitive. I’m sure incentives for customers to hold with one provider will be common.
2. Partial ISA transfers
Currently, you can only do partial transfers of funds that you’ve paid into before the current tax year. If you want to move money you’ve paid in since 6 April that year, you need to do so in full. This is changing and from April 2024, which means clients will have greater flexibility. For example, if you have £15,000 in a cash ISA and want to move just £10,000 of it to a new provider, you’ll be able to do so, regardless of when that £15,000 was paid in.
In summary, the ISA has proved to be a hugely successful product that has enabled millions to build their wealth in a tax-efficient manner. Additional flexibility can only be a good thing as this will help to boost the incentive for people to save and invest. At the other end of the life cycle, they can also be a fantastic way for clients to enter drawdown and leave their pensions invested.
We look forward to seeing what happens over the next 25 years.
