Do we really need another Isa allowance?

The only way the much-trailed “Brit Isa” was going to be welcome was as an additional allowance. However, it’s still only a half-formed idea to nurture saving in UK plc. Plus, to the disappointment of many marketing departments, Jeremy Hunt, chancellor, has named it the decidedly less catchy “UK Isa”.

It’s difficult to complain about an extra £5,000 a year in a UK Isa, but would an increase in the core Isa allowance have been preferable? The main allowance has been frozen at £20,000 since 2017, but inflationary uplifts would have made it £25,441 today. Plus, the further cuts to capital gains and dividend allowances coming on April 6 mean sheltering investments in this popular tax wrapper, which are not subject to UK income tax or capital gains tax, is even more essential.

Ultimately, do we really need another Isa allowance? It’s continuing the trend of making what should be the simplest savings vehicle into a complex swath of variants and rules.

There are already four types: cash, stocks and shares, innovative finance, and lifetime. Some struggle to choose between them, let alone picking the underlying investments. By putting extra complexity in the way of customers, a fifth adult Isa may not drive the outcomes the government hope to achieve.

I highly doubt this will be a “Tell Sid” moment, capturing the public imagination for investing in shares.

According to the latest annual government savings statistics, 11.8mn adult Isa accounts were subscribed to in 2021-22. That year, the average contribution to a stocks and shares Isa was £8,690. The number of people who reach their existing £20,000 allowance is very limited. Only 15 per cent of subscribers saved at the maximum, rising to 39 per cent of those with income of £100,000 to £149,999, and to 61 per cent of those with income of £150,000 or more.

On that basis, it’s hard not to see the UK Isa as another big tax subsidy for the wealthy.

Meanwhile, it’s not yet clear what investments will be allowed into a UK Isa as the government will not consult on the details until June.

Based on the consultation document, be prepared to travel back in time to the Personal Equity Plan regime introduced by Nigel Lawson in 1986.

Company shares will probably be allowed. As previously employed in PEPs, the approach could be to define “eligible UK companies” as ordinary shares in companies that are incorporated in the UK and are either listed on a UK stock exchange or that trade on one. However, it would not take into account the proportion of the company’s commercial activities conducted in the UK, as defined, for example, by source of revenue or location of assets.

PEPs allowed investments in authorised unit trusts and investment trusts if at least 75 per cent of the value of the investments held by the fund were invested in eligible UK companies. However, fans of investment trusts, which are technically UK shares, will be disappointed to find they are not specifically mentioned in the UK Isa consultation document, though there is mention of “fund managers who may want to create qualifying funds”.

The government also proposes that “corporate bonds issued by Isa-eligible companies” and retail gilts should be included. There are likely to be restrictions on holding cash within the additional allowance.

To make a UK Isa work, the rules will need to prevent canny investors from using the new £5,000 allowance and then swapping to non-UK assets. Maybe a transfer or exit penalty?

Whatever its design, the government is also relying heavily on the goodwill of big players in the financial services industry

Whatever its design, the government is also relying heavily on the goodwill of big players in the financial services industry to build and offer the new accounts to their customers. Only a few offer lifetime Isas, for example, and there’s a risk the UK Isa could follow a similar path.

While the largest investment platform, Hargreaves Lansdown, welcomes the consultation, rival platform AJ Bell says the UK Isa is “doomed to fail”, arguing UK retail investors are already putting 50 per cent of their Isa investments into UK assets so the additional allowance will not change investor behaviour.

Meanwhile, another big platform, Interactive Investor, argues that abolishing the stamp duty on UK shares, which penalises investors who buy British, would have been an effective way to nurture UK share ownership, putting them on a level footing with other markets. This is especially relevant as the UK grapples to maintain its competitiveness as a place for companies to not only list, but also to scale.

But the retail investment market isn’t going to revive UK plc on its own. Even if every stocks and shares Isa holder using their maximum allowance went out and bought £5,000 of UK shares, AJ Bell calculates that it would amount to just 0.2 per cent of the UK market’s aggregate value.

So, to get the volume of investment in UK equities, the government needs the much larger pension fund industry on board, where investment into UK equities has fallen to about 6 per cent.

Here, the chancellor appears to be going for a carrot before stick approach. Pension funds have already this month been told that they will have to publicly disclose how much they invest in UK businesses. But the Budget documents state: “The government will review what further action should be taken if this data does not demonstrate that UK equity allocations are increasing.”

In the end, investors in Isas and pensions shouldn’t raise their UK shares exposure and risk a comfortable retirement just because Hunt thinks it’s a good idea.

Yes, there could be an opportunity in the UK stock market, which many believe is undervalued. But good asset allocation practice is to avoid any “home bias” of investing too much in UK shares.

Anyone using a UK Isa should reallocate money to global shares in their main Isa in order to limit their overall UK exposure. While investors in workplace pensions who see high exposure to UK shares in their employer’s default funds might choose to opt out for the same reason.

Moira O’Neill is a freelance money and investment writer. Email moira.o’neill@ft.com, X: @MoiraONeill, Instagram @MoiraOnMoney

Letter in response to this comment:
How government could solve the UK market’s lack of capital / From Mark Slater, Chairman, Slater Investments, London EC4, UK