When it comes to personal finance, so much of what Labour has tried to do over the past couple of years has had potential.
The execution, however, leaves a lot to be desired – and the latest changes to the ISA landscape sit right in that bracket.
Under new rules announced on Tuesday, and which come into force next year, those who hold cash in their stocks and shares ISAs will be hit with a 22 per cent levy on interest earned.
Where there was the chance for simplification, complication arrives. Where Brits could have been encouraged, they instead face uncertainty. And where real change was actually needed, inertia won the day.
Rachel Reeves had an open goal to make some genuine and overdue upgrades across stocks and shares ISAs and Lifetime ISAs (LISAs). Yet she somehow missed the mark again – in what could be her final economic policy change as chancellor.
There was never going to be a solution which suited everybody. But key tweaks to the policy could have left most people feeling as though things had changed for the better.
The Lifetime ISA might be the biggest example here.
Some platforms have argued for keeping it and making a few simple alterations. Instead, an entirely new product is coming into play: the First Time Buyer ISA (FTB ISA).
The new product is fine in principle if it fixes the issues with the previous version. But one of the biggest problems still remains: a £450,000 cap on the property price for which the money can be used.
The rule is outdated, restrictive and punitive. Prices have risen beyond across many parts of the country and if you are a first time buyer, the size or price of property shouldn’t be dictated by a postcode lottery.
The new policy removes the penalty for using your own cash for something outside the established rules while the age limit has also been removed – both of which are sensible moves.
But another change to the new FTB ISA is damaging to those building a deposit. Instead of the government adding in the 25 per cent bonus top-up every year, it will now only be added at the point of purchase.
This means ISA holders will miss out on the compounding effect that putting in extra money each year would add to – leading to a real-life loss of wealth-building ability compared to the current LISA.
Brian Byrnes, director of personal finance at Moneybox, one of the UK’s biggest LISA providers, called the new product “complex”, “anti-business” and lacking full detail.
“The current proposal is more complicated, more restrictive and potentially less valuable than the options many savers already have available,” he said.
“We fully support the government’s continued focus on helping first-time buyers. However, the more detail about the new product that emerges, the stronger the case becomes for improving the existing Lifetime ISA rather than replacing it with something demonstrably inferior.”
The government has also been vocal about encouraging and educating more people to invest over the long term.
This is important for the long-term wealth of families and the economy as a whole, when added to improving financial education on the school curriculum and a wider push to help people take control of finances.
But again, it’s a case of one step forward, one leap backwards.
You cannot force people to invest – you must show them why it’s worthwhile, why it’s right for them and why it’s not as complex as it is often made out to be.
Cutting the cash ISA allowance is a ham-fisted way of pointing people toward stocks and shares ISAs – but at least it reminds savers that there’s another option and begins the conversation of why the government wants you to consider long-term investing.
But then comes this latest decision to tax cash held in an investing ISA.
Yes, circumnavigating rules is something to be avoided. Yes, some people may have dumped the whole £20,000 in an investing ISA and left it there, earning tax-free interest.
But on one hand – so what? Is that lack of an extra few people who really don’t want to invest going to break HMRC? Will it upset the entire economic plan of the nation if someone simply says ‘no’ to companies over cash? And who is to say they wouldn’t eventually use it as a gateway to testing out investing?
It simply serves to make what should be the most easy-to-understand product available to Brits become even more layered and more complex for first-time users.
You can save £20,000 – but only with chunks here and there. It’s tax-free –except it’s not, if you have cash. You can invest in money markets – but not all your money.
The tax-on-cash change also completely ignores normal investing processes anyway. After all, most investors would habitually have some cash on hand, for either buying opportunities or saving up until they have enough for a purchase, or because they recently made a sale. Now, that all needs further planning – or a tax bill.
Over and over again, the added rules become contradictory and confusing.
Rachel Vahey, of AJ Bell, called the changes “riddled with unintended consequences” and flatly pointed out that the reforms “will do little to encourage new investors.”
Remember the appearance of Savvy the Squirrel two months ago? Rachel Reeves and her furry sidekick launched the government’s official push to get the nation investing with a website, some taxi-door ads and a podium appearance at the London Stock Exchange.
While investing itself is a long-term game, the big early push doesn’t seem to be placing the government as people’s source of education and interest. Website analysis suggests takethenextstepinvest.co.uk has had fewer than 10,000 visitors up to the end of May. A search for “how to start investing UK” doesn’t see the flagship site appear in the first ten pages of results. And the Instagram account has 384 followers. Not quite banging the drum as loudly as might have been hoped, perhaps.
Elsewhere, the contradictions continue. Pushing for more investors is met by raising tax on dividends, for instance.
Avoidable if you invest in an ISA of course, but what if you max it (£12,000 in cash, £4,000 in a LISA and the rest in a long-term green investment inside an Innovative Finance ISA, for example) beforehand, or have an investment which sits outside one? Hardly an encouraging experience to do more of it.
Even without considering the detrimental impact on small business owners that tax hike will have, it’s yet another confusing message from the chancellor as to which way Brits should face.
And as for banning moving your own money between stocks and shares ISAs and a cash ISA? Here’s precisely what that will inevitably lead to: bad decisions.
Not selling when you need cash, or should lock in a profit, simply so that you don’t pay the tax. Not lowering your exposure to potential volatility when you specifically need some stability in your financial planning, again to avoid tax on the cash held. Some might not even be able to sell, withdraw and put back into their cash ISA as “new” money, because it sends them over the annual allowances - all extremely negative barriers to letting people start to invest and properly plan out their financial futures.
Data from Boring Money shows more than two in five (42 per cent) cash savers want simplicity over anything else to move into an investment product.
But, as CEO Holly Mackay points out, that’s something these latest changes keep eroding. “The four main ISA variants have four different contribution amounts for different ages, and now we will have different levies on cash held and rules on qualifying products. It’s pretty pointless complexity which will deter more people from investing,” she said.
And yet, hope remains.
Despite the hurdles faced and changing rules, more people are starting to invest than before.
The Independent has also spoken to several financial services providers who have brought in, or are bringing in, targeted support to help their clients know what they should be considering. That’s an introduction which should have a very real and beneficial impact over time.
If the Treasury could put a few more of the details right along the way, it would help that transition enormously.
