ISAs: how to encourage savings and growth in the UK

Savings culture – The Chancellor has highlighted the need to develop a savings culture similar to that of the US. This suggests tilting the focus to returns, rather than security, and to equities, rather than cash. The current market volatility should not change this approach.

ISA changes – Reducing the Cash ISA and refocusing the Stocks & Shares ISA on UK investments would enhance the savings culture in the UK and encourage domestic growth. Reducing the number of ISA options would lower complexity and enhance engagement. This should be accompanied by a focus on improving access to investment advice.  

Tax relief – There is c.£9bn of tax relief on ISAs. A focus on productive assets and the UK would deliver a better return for taxpayers.

The focus on consumer protection and risk has resulted in a sharp reduction in the investment culture over the last 20 years. Changing this would improve returns for savers and the level of investment in the UK. 

 

What is being reviewed? The government has confirmed that it is looking at the ISA market to improve returns for savers and to support growth in the UK. The outcome of this review is likely to be in the Autumn Budget given that it involves tax decisions. There was also a Treasury Committee call for evidence on the LISA, which is aimed at people saving for a home purchase or retirement.

Time for a reset. The ISA has been a successful savings product, growing to a total value of £740bn as at March 2024. The issue is the scale of funds in Cash ISAs (c.£394bn), with material incentives to invest in unproductive assets. Also, there is no requirement for any fund in a Stocks & Shares ISA to be invested in the UK—providing tax breaks for overseas investments makes little sense. In addition, the ISA product line-up could be simplified to reduce complexity.

Building an investment culture. The focus on risk and protection of assets has resulted in poor returns for many savers (in cash and pensions). We need to learn from other countries regarding how to engender a savings culture that encourages a greater focus on returns, which would transform the value of long-term savings. The difference in returns has been significant, with moneyfarm showing an average return of 9.64% for the Stocks & Shares ISA vs 1.21% for the Cash ISA (albeit during a period of particularly low rates) over the last 10 years.

Key recommendations

1. Cap new cash ISAs at £5k.
2. Focus Stocks & Shares ISAs on UK investments.
3. End the LISA and the Innovative Finance ISA.
4. Rename the Stocks & Shares ISA to the Investment ISA.

 

Tax relief of £9.4bn on ISAs

The latest stats from HMRC show that there is an estimated £9.4bn of tax relief from ISA investments, which sounds to be in the right ballpark given the £740bn held in ISAs as at March 2024. The source can be found here in section 5.16.

The ‘cost’ to the government has risen materially in recent years, as shown in Figure 1.

Figure 1: Rise in tax relief (£bn)

Source: HMRC

 

The estimated increase has been driven by a combination of higher interest rates, increased asset values, and lower individual allowances (on dividend and interest income as well as capital gains).

The HMRC data does not provide a split between the different ISAs, but it is reasonable to assume that the majority comes from the Cash ISA and the Stocks & Shares ISA. We estimate the ‘cost’ of the Cash ISA to be c.£2bn, equating to c.10% of the interest earned. This takes into account the reality that a large number of savers in Cash ISAs will not benefit from a tax reduction given their income and tax allowances on interest.

The key point is that ISAs provide a significant tax benefit to savers, but there is no requirement to invest in the UK or in productive assets. This makes little sense given the state of public finances and the weak economic performance.

Reducing the Cash ISA limit

The government has confirmed that it is looking at reforms of the ISA market. Below is the relevant text from the Spring Statement:

“2.65 The government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission. Alongside this, the government is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest.”

There have been suggestions that future cash contributions are to be capped at £4k per annum. Here are our thoughts:

• Savers would benefit from investing in equities given the long-term track record of outperformance of equities vs cash.
• The UK is an outlier for providing significant tax incentives for cash holdings.
• Cash ISAs are marketed as tax efficient, however, many savers do not receive a tax benefit given the Personal Savings Allowance.
• The Stocks & Shares allowance was initially 2.3x higher (£7k vs £3k) than the Cash allowance. They were only equalised by George Osborne in 2014.
• Increased investment in growth assets in the UK would enhance the long-term performance of the economy.
• Many people choose to save without any risk to their capital. However, Premium Bonds also provide tax-free savings and currently pay an average prize rate of 3.8% with the potential of larger prizes (reduced from 4.0% in April 2025).
• Larger savers can use all of their ISA allowance on Stocks & Shares and still invest up to £50k in Premium Bonds, whereas any contributions to a Cash ISA limit the amount that can be invested in a Stocks & Shares ISA.

 

We see a £5k level for the Cash ISA as a sensible upper limit as it would include a large proportion of those that currently contribute. People that want to save more in secure assets can use other products (such as Premium Bonds or easy access accounts) or purchase gilts in a Stocks & Shares ISA.

Cash ISA – the details

In 2022/23, 7.9m people contributed £42bn to cash ISAs with an average subscription of £5,296. Although this is a considerable number of people and value, there has been a significant reduction in the number of subscribers. For example, in 2012/13 there were 11.7m subscribers, with a total contribution of £41bn at an average of £3,501.

Data from the Building Societies Association shows the amount in Cash ISAs to have risen to £389bn as at February 2025. Figure 2 below shows the scale of the increase.

Figure 2: Value of Cash ISAs (£m)

Source: BSIA / Bank of England

 

According to HMRC, there were 14.4m Cash ISA accounts with an average value of £13,372 at the end of 2021/22 (the most recent detailed split of the data).

In that year, 6.5m people contributed to a Cash ISA alone. Of these, 4.4m (67%) contributed less than £5k. It seems reasonable to assume that their level of contributions will be unchanged in the event of a £5k limit. If we assume an average of £2.5k each, this would equate to £11bn.

If we assume that the remaining 2.1m people contribute an average £12.5k, the total contributions would be £26bn per annum. In order to assess the increase in investment in Stocks & Shares ISAs, we assume the following:

• All of the 2.1m people contribute to a Cash ISA at the new upper limit (£5k).
• Of the 2.1m, 70% (ie 1.5m) choose to retain their savings in cash.
• Of the 2.1m, 30% (ie 0.6m) use their allocation to invest £5k in a Cash ISA and the remaining £7.5k in Stocks & Shares.

This would increase the investment in Stocks & Shares ISAs by £4.5bn per annum, which would be a meaningful increase. This is based on the 2021/22 numbers; we estimate that the level would be c.£6bn based on current levels of subscriptions.

There were 614k people who subscribed to both Cash and Stocks & Shares ISAs in 2001/2. The data does not give a split between the two ISAs, but the average was c.£8k across both ISAs. Given the level of subscriptions, there is unlikely to be a meaningful shift to Stocks & Shares ISA from this cohort.

 

Tax considerations

Savers currently receive a personal savings allowance (PSA) of £1k for basic rate taxpayers, £500 for higher rate, and zero for additional rate. This means that at 4% interest, you need to have £25k of savings if you are a basic rate taxpayer or £12.5k for higher rate to make an ISA of any tax benefit. Given that the average holding in a Cash ISA is c.£13k (based on the latest data from March 2022), it is debatable that there is any real tax value in the product vs an easy access account for a large number of people saving in a Cash ISA.

In reality, many people will be receiving interest at a far lower rate than the most attractive offers. For example, the current NatWest instant access Cash ISA offers only a 1.4% interest rate up to £25k. It is debatable that this should be allowed to be marketed as a product that enables people to use their tax-free allowance. NatWest’s Fixed Rate Cash ISA offers 3.75% for a one-year fix.

In 2021/22, 12.9m (90%) of people who contributed to a Cash ISA were basic rate taxpayers (according to the income bands), 1.4m (9%) were higher rate taxpayers, and 0.1m (1%) were additional rate.

The PSA was introduced in 2016 with the intention of removing most savers from paying tax on their savings (estimated at 18m people/95% of taxpayers) – click here for details. The impact on the Exchequer was anticipated to be c.£600m, however, the current level will be materially higher given the change in interest rates. If the Government wants to protect savers from any changes to Cash ISAs, the personal savings allowance could be adjusted to reflect.

Premium Bonds vs Cash ISAs

Over 24m people have Premium Bonds with a total value of £129bn. Although there are higher rates of interest available in Cash ISAs (eg Hargreaves Lansdown at 4.4% currently for an easy access account), your chance of winning a larger prize (max £1m) grows as you buy more bonds. Although Premium Bonds are limited to £50k, that amount is always available, whereas you are not able to carry over any unused ISA allowance. Here is a comparison of Premium Bonds and Cash ISAs from MoneySavingExpert. The cap on premium bonds was last increased in June 2015 (from £40k to £50k).

UK cash

Large numbers of people in the UK retain cash; much of this will be their ‘emergency account’. However, there is also a combination of limited financial awareness and unnecessary level of risk aversion. Over the longer term, this contributes to a lack of savings (particularly important in retirement) as well as a lack of capital to generate growth in the economy. Other countries (notably Japan) have been wrestling with the same predicament. Japan took the UK blueprint and introduced the NISA in 2014 – this has also been a successful investment product with c.25m account holders; however, it is limited to investment in stocks and shares rather than cash.

According to the Bank of England, there was £2.1tn in savings accounts in the UK as at January 2025, which has doubled since 2008, as shown in Figure 3 below.

Figure 3: Increase in cash holdings (£m)

Source: Bank of England

The Bank of England estimates that there is £299bn of cash held in non-interest bearing accounts, which has grown more than 6 times since 2008, as shown in Figure 4 below.

Figure 4: Increase in cash held in non-interest bearing accounts (£m)

Source: Bank of England

This demonstrates the scale of cash holdings, the level of risk aversion, and the quantum of unproductive assets in the UK. This is a huge missed opportunity for both savers and the overall UK economy.

Introducing a home bias for Stocks & Shares ISA

When the ISA was introduced in 1999, there was a substantial home bias to investing as well as a high cost of investing overseas. At the time, there was a reasonable perception that expanding the range of investments was positive for investors. Given the limit of £7k per year and the restrictions on investment, there was not a concern that ISAs would have a significant impact on tax revenue nor on the level of investment in the UK. However, there has been a considerable change over the last 25 years and it is high time that the rules were reassessed.

• UK capital for UK investment – The globalisation of investment has been a long-term theme but has been far more prevalent in the UK than other markets. This may make sense for an individual pension fund, charity, or individual investor, but is disastrous for the domestic economy. It directly impacts the rate of economic growth, the cost of capital for UK companies, and the savings culture in the UK. Providing material tax benefits to enable investment in overseas companies makes no sense.
• Cost of capital – Companies listed in the UK currently have a competitive disadvantage as they trade on lower valuation multiples than competitors listed on overseas markets. This means that raising capital is more expensive in the UK, restraining UK listed companies’ ability to use equity to make acquisitions and ensuring that they are more likely to be seen as targets rather than acquirors.
• Funding growth – The current valuation discount does not just hinder the desire and potential for UK-listed companies to raise growth capital, it actively discourages it. This can be seen by the surge in share buybacks, which reflects the relative attraction of buying in your own shares compared to investing in your business.
• Targeting tax benefits – ISAs are tax-efficient savings schemes, but this benefit is increasingly being used to support and grow companies that are listed overseas. It makes sense for government schemes that provide tax benefits to be focused on growing the domestic economy.

The importance of home investment was incorporated into Personal Equity Plans (the forerunner to ISAs) and there was a requirement that at least 75% of the value had to be in shares listed in the UK. Introducing a similar requirement for ISAs would materially change the level of investment in the UK equity market, driving a healthier ecosystem, enhanced economic growth, and increased tax revenue.

Simplifying the ISA market

A recent survey from aberdeen showed that 23m (44%) of UK adults have poor financial literacy and a report from St James’s Place showed that 24.6m (47%) have never received any financial advice. These statistics should be a key consideration for policy makers given the importance of long-term planning to ensure a healthy standard of living. Key barriers to financial literacy include complexity and low risk tolerance.

Overload of information, a plethora of products, and complex terminology causes confusion and inertia. ISAs are a good case in point – although they are popular, many people are confused by the array of products on offer.

This AJ Bell report discusses the case for ISA simplification. The Opinium survey in 2023 found that 49% of people (out of 2000 surveyed) thought that the different versions of ISAs made them too complicated and that 30% would save more if they were less complicated.

An additional feature is the application of risk, which is well meaning but off-putting. As a result, far too many people are disengaged from finance and savings. A key issue is the focus on risk and asset protection. This emphasises the safety of the Cash ISA and encourages risk aversion, even though many people do not actually receive any tax benefits and would receive a higher income from other products. For longer-term investors, an acceptable level of risk should provide improved outcomes vs risk-free investments.

This report for The Investing and Savings Allowance (TISA) highlights the negative consequences of excessive risk warnings. A more balanced approach can enable savers to better judge the risk and reward. The research finds that highlighting long-run returns from equities as part of the risk warning increased the amount invested by 21% for women and 7% for men. The research also looks into the benefits of incorporating investment insight in risk warnings, such as  regular investments over time and diversification to mitigate volatility. The key message is that the current stark risk warnings result in perverse outcomes for savers.

The introduction of Consumer Duty by the FCA in 2023 has brought in a requirement of consumer protection and requires firms to put their customers’ needs first. This has brought many improvements (eg action to ensure that cash savers receive fair value rates), however, there is a risk of perverse outcomes such as reduced innovation, increased cost, and conflict with the growth objective. It could also result in firms being cautious about promoting Stocks & Shares ISAs to risk-averse Cash ISA holders or about promoting a home-biased ISA due to the risk of misselling allocations. The FCA would need to clarify the role of Consumer Duty to ensure that the policy objectives are not undermined by onerous regulation.

We recommend the ISA product range be reduced to the following products:

• Stocks & Shares ISA – Adult and Junior
• Cash ISA – Adult and Junior

 

We also recommend renaming the Stocks & Shares ISA to the Investment ISA. The current terminology is confusing for many people and infers that the ISA is for investors in equities rather than the broader range of products available. Changing to an Investment ISA would be more understandable, more inclusive, and align with the government’s focus on growing retail investment and long-term savings. A name change coinciding with a reduction in the quantum of the Cash ISA and a government marketing campaign could address the current risk-aversion and provide an important message that investment is about building long-term savings rather than being akin to gambling.

We recommend ending the LISA and the Innovative ISA

• The Lifetime ISA (LISA) was launched in 2017, with the aim of encouraging saving to buy a home or for retirement. These twin aims are not necessarily compatible and there are a number of complexities with the product.
• People will have been attracted by the 25% bonus on offer (up to £1k, based on the £4k max annual contribution) but are probably less aware that there is a 25% penalty fee (on the total in the account) if the money is withdrawn and not used for a first home or retirement (described as an unauthorised withdrawal). This means that the penalty can end up being greater than the tax benefits received – bizarre for a supposedly tax-efficient product!
• The age limitations (18-40) do not make sense for a long-term savings product and the LISA is not as attractive as saving into a pension.
• The £450k limit for a house purchase means that the LISA does not work for many people, which may not have been obvious when they started to save.
• About 286k people have made ‘unauthorised withdrawals’ amounting to £887m by April 2024, thereby triggering the penalty fee.
• The level of contributions are relatively small. In 2022/23, 755k people contributed a total of £1.9bn to a LISA with an average contribution of £2,478.
• There has been a long-standing perception that property is a good investment to fund retirement. However, the increase in asset values, the rise in long-term rates, and the increasing cost of home ownership means that it is important to build a pension pot rather than just focus on owning a property.
• The Innovative Finance ISA was introduced in 2016 to reflect interest in peer-to-peer lending. There has been low take-up and this is surely an unnecessary part of the ISA product range. Furthermore, these loans are not protected by the Financial Services Compensation Scheme and the level of access to funds is regularly restricted and there may be exit fees. In 2022/23, only 17k people contributed a total of £0.1bn to an Innovative ISA with an average contribution of £6,906.
• The ability to add further funds to Help to Buy ISAs could be ended (the ability to open a Help to Buy ISAs ceased in 2019).

There have been suggestions to merge Cash and Stocks & Shares ISAs. This would improve flexibility and simplicity, and should certainly be a consideration for the government. However, there are other points to consider:

• Many people chose Cash ISAs because they are clear that these are effectively savings accounts. Merging Cash and Stocks & Shares ISAs may actually be confusing and off-putting for many people.
• It would not address the desire to nudge people into investments that provide a higher rate of return over the long term.
• To achieve the policy aims, it would require restraints in the merged ISA to cap the level of cash, which would add to confusion.
• It would not deliver on the desire to shift investment into domestic assets.
• A merged ISA would potentially disadvantage the building societies given that they focus on Cash ISAs and many do not offer a shares option.

The key questions

Should market volatility impact considerations?

Inevitably, there will be some commentators that point to the current volatility in markets to make the case that investment in equities is ‘too risky’ for many people. We would highlight a number of points:

• Investing when markets have fallen should be seen as more attractive than when they are at all-time highs. Regular investments can help investors average out short-term volatility in markets.
• The attractions of supposedly safer and less volatile assets are regularly overstated. Equities always have a price and can be traded at a low transaction cost. Private assets are generally illiquid and valuation is conceptual, while property investment has significant transaction costs, is illiquid, has concentration risk, and is cyclical.
• Many commentators focus on the performance of indices or share prices to assess returns, whereas the right comparison is total shareholder return. Given the dividend yield on the FTSE 100 is 3.7% currently, the index needs to rise by less than 1% per annum to outperform cash savings rates.
• There is a tendency to materially overstate current economic challenges and their impact on long-term equity returns. There have been numerous setbacks over the last 40 years (recessions, the dot-com crash, theglobal financial crisis, Brexit, Covid, the Ukraine war, inflation spikes, etc) and yet equity markets have continued to deliver attractive returns.
• Value creation in equity markets is generally driven by the winners. This can be from long-established companies that have strong market positions and are able to reinvest cash generation at attractive rates of return or it can be from new companies that thrive through innovation or disruption. Either way, the equity market has a success bias, which helps to drive capital appreciation.

 

How important is investment advice/financial education?

The current level of investment advice in the UK is woeful, with only 8% of adults (FCA survey) in the UK taking financial advice. This leads to poor financial decisions based on insufficient knowledge of risks and rewards. The level of savings in Cash ISAs is just one example, where many people do not understand the impact of inflation nor the fact that that they are not actually saving tax.

Research from the Financial Services Compensation Scheme has found that 64% of UK adults with savings, investments, or a mortgage have not sought regulated financial advice in the last five years.

Many people are put off from seeking financial advice given perceptions of cost. However, you can take £500 out of your defined contribution pension three times before the age of 55 tax-free if it is used to pay for financial advice (government announcement). This policy was introduced in 2017 to enable better savings decisions. However, this allowance is currently underused as many providers do not offer this service and many savers are unaware that it even exists.

This report from Unbiased details the importance of financial advice and discusses this International Longevity Centre report, which highlights that people taking advice were on average £48k better off over a 10-year period and that benefits for the less well-off were proportionally larger.

We see improved financial education and literacy as a vital social goal as well as being important for economic growth. Financial education should be embedded into the school curriculum, with the government supporting initiatives to ensure that individuals receive guidance and understand the importance of financial planning and advice as they engage with mortgages, savings, pensions, and financing products.

This is a particularly pertinent issue in the UK as many people have relied on increasing property valuations and defined benefit or public sector pensions to fund their retirement. The difficulty and cost of getting on the housing ladder, combined with the cost of moving, means that the housing market can no longer be relied upon to provide asset security in retirement. In addition, the closure of defined benefit schemes and the paucity of assets in defined contribution schemes means that younger generations have inadequate savings either for emergencies or to fund retirement or long-term healthcare.

A priority of any government should be the long-term financial health of its citizens and this has never been more important given the challenging economic environment. It is encouraging that this has risen up the political agenda, but we are yet to see material changes to drive greater financial literacy or understanding of the long-term importance of investment returns.

It is particularly notable that in the US people have c.4x more of their wealth in investments compared with people in the UK (33% vs 8%), with the focus of the 401(k) firmly embedded in financial planning.

 

Will a reduction in the maximum contribution in a Cash ISA impact lending by banks and building societies?

The overall level of cash savings in the UK is c.£2.1tn, of which cash ISAs are c.£0.4tn or 19%. Over 70% of people have some form of cash savings account (54% savings account, 28% cash ISA, and 26% Premium Bonds according to the FCA Financial Lives 2022 Survey). In this survey, 37% of people had more than £5k in cash savings (albeit 22% of those surveyed did not say). All this shows that there is a broad base of cash savings and savings products.

Total contributions to Cash ISAs are currently c.£40bn per year. We estimate that the annual contribution to the Cash ISA would decline to c.£20bn if there was a £5k limit. Of the remaining £20bn, we estimate 70% (£14bn) would go into other savings products and 30% (£6bn) into Stocks & Shares ISAs. As a result, the net impact on cash savings from capping the cash ISA at £5k would only be c.£6bn per annum.

Capping the Cash ISA would not reduce the level of cash holdings, merely reduce the level of growth (by less than 0.3% per annum). This would have a close to zero impact on the mortgage market, both in terms of availability and the rate.

The Building Societies Association (BSA) has stated that Building Societies hold £399bn of retail deposits, equating to 19% of total UK deposits (source: BSA release). The BSA survey of 2k people (undertaken by Omnium in February 2025) shows that a large proportion of people care about retaining the value of their asset. This is not remotely a surprise given that this will be a core focus of many people with Cash ISAs and means that a large number will continue to save in cash products.

Will a shift from Cash into Stocks & Shares result in improved returns?

As mentioned earlier, the data from moneyfarm shows the significant outperformance of Stocks & Shares ISAs vs Cash ISAs. Over the long term, cash regularly fails to match inflation, whereas shares outperform inflation. This is not surprising given that companies generally benefit from rising inflation and provide both growth and income. Figure 5 overleaf presents some data on the matter from Schroders.

Figure 5: Shares are better than cash at outperforming inflation over the long term

Source: Schroders

 

Figure 6 below shows the performance of shares since 1926.

 

Figure 6: Shares performance since 1926

Source: Schroders

 

Figure 7 overleaf shows the performance of cash (based on short-term deposits) vs UK equities and illustrates the importance of measuring total shareholder return rather than just the index performance.

 

Figure 7: One-year fixed-rate bond versus UK stocks (cumulative returns, 2012 = 100)

Source: FT, Bank of England

 

This analysis from AJ Bell (from February 2025) shows the long-term performance of cash vs other assets. This highlights that a Cash ISA of £1k in 1999 would now be worth £2,016, whereas investing in the UK would have delivered £3,300 and globally £4,641.

There is clearly higher risk in investing in shares and market timing is important, particularly if capital is required at short notice. As a result, the balance of risk vs reward needs to be recognised. For many people, maintaining asset value is essential. However, this needs to be balanced with tax incentives and the missed opportunity of increased savings.

Will an increase in contributions to Stocks & Shares ISAs increase investment in the UK?

According to the Investment Association, retail investors have reduced their UK equity allocations from 29.6% in 2008 to 11.5% in 2023 (source: IA 2023–24 report, p.72). If we use this as a guide and the estimate of £6bn per annum additional investment in Stocks & Shares ISAs, then the additional investment in UK equities would be £0.7bn per annum. In reality, the impact is likely to be materially lower given the trend to overseas investments and global passive funds (as discussed below).

Although any increase in flows is helpful, this compares to the c.£8bn of annual outflows from UK equity funds, as shown in Figure 8 overleaf.

Figure 8: UK equity fund flow (£m)

Source: Calastone

 

As a result, we see reducing the maximum contribution of Cash ISAs as being of marginal benefit to overall investment in UK equities.

Would focusing the ISA on the UK benefit the UK equity market?

As discussed earlier, investors currently benefit from tax incentives to invest in Stocks & Shares ISAs, but there is no requirement to invest domestically. We recommend returning to the premise of the PEPS, whereby a proportion has to be allocated to qualifying investments. This could apply to existing ISAs or just for new ISAs.

We do not have data for the current proportion of investments that would be regarded as qualifying as UK investments. However, this article from Hargreaves Lansdown highlights the most popular funds this year for investors in Stocks & Shares ISAs. The top five active funds’ weighting to UK equities were 11.3%, 8.9%, 8.3%, 0%, and 9.4%, respectively, and the top five passive funds’ weightings to UK equities were 3.4%, 0%, 0.11%, 0.06%, and o.05%, respectively. This data clearly shows that most of the money being invested in ISAs at the moment goes overseas and supports the growth of overseas companies – this does not look like a good use of taxpayers’ money.

Around £30bn is invested in Stocks & Shares ISAs per annum, so a 50% weighting to UK qualifying assets would ensure £15bn of investment into the UK per annum. This would make a substantial difference to fund flows into UK companies.

Would a UK focus overly restrict choice and diversification?

We recommend that all UK-quoted companies with a primary listing and funds that invest in UK-quoted companies or assets qualify. Although there would be a restriction of choice compared to the current freedom to invest, we believe investors would continue to benefit from the following:

• A wide geographic exposure given the broad spread of UK companies.
• A large number of companies listed in the UK (more than 1,300) with a total market capitalisation of £2.5tn.
• Access to investment trusts and funds with a wide range of asset classes and geographies.
• Investors would still be able to invest in overseas companies, albeit the quantum would be limited. They would be able to make further investments overseas outside the ISA wrapper.

Would a UK focus impact on returns?

An understandable concern is that mandating a proportion of an ISA to UK investments will impact on returns. We would highlight a few key points:

• Investing in UK companies reduces currency risk for UK residents. We regularly hear about the ‘benefits’ of diversification, but this brings significant currency exposure, which is regularly understated.
• There is a material tax benefit from saving in an ISA. At a time when government finances are stretched, it makes sense that this tax benefit is targeted at driving increased growth in the UK, which benefits all citizens.
• Investors would still be able to invest as much as they liked overseas, but they would not get a tax benefit from the UK if this was done outside a tax wrapper.
• The UK market has struggled in recent years, so on a look-back basis returns would have been better through investment overseas. However, new investments are not exposed to historic returns and an improving UK economy should provide attract returns.
• A key reason for the UK’s underperformance has been capital flowing overseas (pensions, charities, retail). Encouraging UK capital to be invested domestically would improve economic growth and potential returns.
• There are plenty of opportunities to invest in UK products that provide exposure to global companies and faster-growth sectors, with many investment trusts delivering this exposure.

How about an Infrastructure ISA?

There are clear attractions of an Infrastructure ISA, including the following:

• It would provide investment for long-term infrastructure assets in the UK, with the capital funded by UK citizens rather than government.
• Returns could be attractively positioned compared to cash savings (eg a base rate 25-50bps).
• A broad range of assets/projects could be included to ensure diversification, with government backing to guarantee returns.
• There would be a positive perception with savers given the ability to receive secure returns combined with supporting investment in UK infrastructure.
• It would effectively create a national wealth fund that is invested in UK infrastructure.
• The tax benefit would support UK investment.
• It would encourage long-term savings given the focus of the investment on long-term assets.

However, it would add to the complexity of the ISA product line-up (unless it replaced the Cash ISA) and there would have to be strong guard-rails to ensure it was effectively managed, combined with transparency and accountability. Furthermore, it would need to have long-term clarity, be insulated from changes in  government, and be effectively monitored for impact and returns.

ISA: a successful savings product

In this section, we discuss the key elements of the ISA market to provide background for those less familiar with the product.

Individual Savings Accounts (ISAs) were introduced by Gordon Brown in 1999 as a successor to PEPs and TESSAs. They have become a key part of the UK savings market for over 22m savers and this article by Gordon Brown gives his views on their purpose and success 20 years after launch.

The key elements of the existing ISA rules are highlighted below:

• A total of £20k can be invested per annum and there is no carry forward of allowances if they are not used. Investments in an ISA are not subject to income tax on dividends or CGT, but stamp duty is paid on purchases where required (0.5% on shares). ISAs are part of an estate when considering inheritance tax (ie 40% tax over certain exemptions).
• The key advantages of ISAs are that they are not subject to a holding period, there is no limit on the total held within ISAs, and the only time limit is the death of the holder (and even then they can be passed on to a partner). This is particularly attractive for people wanting to save, but also for those who want access to their savings as required.
• The total annual investment can be spread across a combination of the ISAs available.
• You must be over 18 to open an ISA. You need to be over 16 to open a Junior ISA for a child and they have to be under 18. Children aged 16 and 17 can open a Junior ISA for themselves.
• The attraction of ISAs has increased with the changes in the UK dividend tax-free allowance (reduced from £2k to £1k in April 2023 and to £500 in April 2024) and the reduction in the tax-free element of capital gains (reduced from £12.3k to £6k in April 2023 and to £3k in April 2024).
• The forthcoming changes to pensions (applying 40% inheritance tax from April 2027) will make saving in an ISA more attractive for many people.

Currently, six different ISAs are available:

• Cash ISA (£20k limit).
• Stocks & Shares ISA (£20k limit).
• Cash Junior ISA (£9k limit), which was introduced in 2011.
• Stocks & Shares Junior ISA (£9k limit), also introduced in 2011.
• Innovative Finance ISA (£20k limit) to access peer-to-peer lending through an ISA, which was introduced in 2016.
• Lifetime ISA (£4k limit), which was introduced in 2018 to encourage saving for a first home or retirement, with the government providing a 25% bonus on your contributions (ie £1k per annum).

Figure 9 below shows how the ISA allowance has increased since its introduction.

Figure 9: ISA allowance

Source: The UK government

 

There also was also a Help to Buy ISA, which was introduced in 2015 and enabled people to save to purchase a first-time property. There was a maximum subscription of £2.4k per annum and a total limit of £12k. The government made it attractive by providing a top-up of 25% up to a maximum of £3,000. This scheme ended in 2019, but holders of existing Help to Buy ISAs can continue to subscribe until 2029. The total of government-funded bonuses from inception to March 2023 was £887m, supporting 558k property completions.

The Stocks & Shares ISA

A total of £20k can be invested in a Stocks & Shares ISA per annum, with the majority invested through platforms (eg Hargreaves Lansdown, AJ Bell, and interactive investor) and wealth managers (eg Rathbones#, RBC Brewin Dolphin, Quilter, and Evelyn Partners). Having originally been focused on UK investments, the spread of available products is now diverse and includes:

• UK companies
• UK funds
• Overseas companies
• Gilts
• Corporate bonds

There is a choice between self-selecting the constituents of the ISA, or having an expert (eg wealth manager) or robo-adviser choose the investments. An example of the latter is the Nutmeg ISA, which uses ETFs.

You have to be over 18 and a UK resident for tax purposes to subscribe for a Stocks & Shares ISA, which means that 54m people meet the eligibility criteria.

 

The scale of the ISA market

The latest data from ONS is for the year to April 2023. In that year, 13.5m ISAs were taken out, with a total subscription value of £74bn. Figure 10 overleaf shows the total amount of contributions per type of ISA in 2021/22 (the most recent detailed split).

Figure 10: Contributions per ISA (£bn)

Source: ONS

 

Figure 10 demonstrates the scale of the Cash and Stocks & Shares ISAs and how insignificant the other products are. Figure 11 below shows the split of the total £736m held in ISAs as at April 2023.

Figure 11: Total value of ISAs split by product

Source: ONS

 

The value held in LISAs is included in the total amount of Cash and Stocks & Shares ISAs. The total amount held in LISAs was £13bn, or 2% of the total value across all ISAs.

Figure 12 overleaf shows that the most popular ISA product in 2022/23 was Cash at 7.9m accounts, ahead of the Stocks & Shares ISA with 3.9m accounts.

 

Figure 12: Number of accounts with contributions 2022/23 (‘000)

Source: ONS