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So when a new ISA is launched by government you’d think everyone is financial services would be jumping for joy. That hasn’t been the case in recent years. At best opinion was divided on the latest proposal for a British ISA, which has now been scrapped. The Lifetime ISA may be next for the chop.
With the possibility of some simplification on the horizon we thought we’d explain why simplification might be more useful than yet another flavour of ISA.
Some of you may remember the forerunners of ISAs, PEPS and TESSAs. A Personal Equity Plan was the equivalent of a stocks and shares ISA introduced by the Conservative Government in their 1986 budget. It was followed in 1990 by Tax-Exempt Special Savings Accounts (TESSAs) in 1990 which was designed for cash savings. Both were popular. In 1997 Gordon Brown, then Chancellor, announced their replacement with the ISA for the 1999/2000 tax year, building one the success of PEPs and TESSAs which were pitched as simple savings wrappers for anyone to use.
The beauty of the ISA at inception, and PEPs and TESSAs before them, was its simplicity. This simplicity attracted money as it was relatively easy for people to understand what and who they were designed for and on a practical level they were easy to invest in. PEPs were invested in well before the internet took off and ISAs were launched when it was in its infancy, so simplicity was crucial.
Today we have four types of ISA, and every time a new one is added, they bring more confusion for consumers and more operational problems for ISA providers, despite the huge leap forward in online technology.
The four adult ISAs are:

cash ISA
stocks and shares ISA
innovative finance ISA
Lifetime ISA

There is also the junior ISAs for under 18s and, previously, the Help-to-Buy ISA for adults.

When we, as financial planners use an ISA allowance for our clients (which we almost invariably do) we use your annual ISA allowance as a way of sheltering as much of your portfolio as possible from tax. There is nothing wrong with that, that is the purpose of the ISA allowance. Funds within your ISA are sheltered from income and capital gains tax, so we will make decisions on which funds to put into your ISA allowance based on the optimal tax outcome. For example, if you already held funds with a lot of growth potential outside an ISA or pension wrapper we might advise you to move them into an ISA, rather than simply put new monies into your ISA.
That is something a professional adviser should do as we consider multiple factors, not simply the funds you invest in. However the ISA is not just a tax efficiency tool for those fortunate enough to be able to pay for financial advice.
In our opinion the ISA should also be something the public at large can understand and safely invest in even if they don’t yet have or need an adviser. This will allow them to save for the long term and appoint an adviser if they reach a point where this is required due to the complexity of their needs or size of the funds they have built up.
In addition to simplicity, ISA should be relatively safe places for investment. Again, this was one of the original aims of the ISA which has been lost over time.
The innovative finance ISA goes directly against this principle, as it is targeting higher risk investments in smaller, less established firms. If we, as professional advisers are sceptical about its benefits, the average consumer with no adviser to help them should be, and even more so.

The Lifetime ISA was designed primarily to help first time buyers to purchase their first home. A noble idea but the devil in the detail means that there are real doubts that it has addressed the problems it sought to resolve. The punitive early withdrawal penalty goes beyond recouping the government bonus on offer, and the property purchase price limit has been stuck at £450,000 since the product was launched. It has arguably contributed to pushing house prices up.
Aside from the specific problems these additional ISAs have presented, the introduction of more options alone will have put some investors off.
Adjustments to the ISA regime are always welcomed, and a number were proposed in the recent budget. Increased flexibility is no bad thing, but it is vital that if we want to increase ISA usage, across the UK as a whole, we make thing simple, safe and easy for people. This will increase confidence in and contributions into the ISA. We would love ISA allowances to go up as well but that will be no surprise to anyone!
This is not something you need to worry about with us looking after your investment strategy. However, we thought it was useful to explain why we believe reducing not expanding the number of ISAs available on the market is the right thing to do for the UK.