Imagine you were tasked with tackling the UK’s obesity epidemic: aiming to transform us from a nation of couch potatoes into, um, lean green beans.
Your first move would be to close the gyms, because some people are too darn fit, right?
Then you’d charge skinny people extra for their fruit and vegetables, obviously.
Or does this approach seem a bit… backwards?
Very wise! Going after those who are thriving by living the very lifestyle you’re trying to promote seems obviously counterproductive.
And yet – with only minor contortions – that is essentially what’s being advocated by the respected Resolution Foundation think tank as the best way to tackle Britain’s savings woes.
Resolution’s report (Google ‘ISA, ISA, Baby’, and ask your granddad why if you’re under 25) bemoans Britain’s table-bottoming savings rate and rightly highlights the profound consequences for the poorest in their having little-to-no financial resources to fall back upon.
But it then very unconvincingly proposes that the best way to solve this problem is to kneecap one of the UK’s most successful and widely adopted financial innovations of the past 30 years – the ISA – by limiting the total amount you can have tax-free in them at £100,000.
Here are my ten main objections to this silly – even dangerous – proposal to cap ISAs.
1. It is an anti-savings measure meant to encourage savings
First the most fundamental. As I said, it’s perverse to tackle a savings crisis by dragging down those who are already doing well.
If anything, people with chunky ISAs should be celebrated and their stories promoted to show what’s achievable.
I’m not naive. I appreciate many rich people get big ISAs just by filling them with copious savings.
But there are also lots of fairly ordinary middle-class investors who’ve secured a great future for themselves – and lessened their burden to the state – by amassing ISA fortunes through good investing decisions. If you’re going to champion saving and investing, start by championing the savers and investors!
2. It would erode faith in saving for the future
It’s already difficult to encourage people to put money away for uncertain returns.
The pension freedoms introduced a few years ago helped by enabling people to better spend their own money as they see fit. But meddling with retirement age limits and the Lifetime Allowance is already working against that good work.
Why add to the uncertainty with new ISA complications?
ISAs are a simple deal. You put taxed money in – that you could have blown instead at the bookies if you wanted to. Afterwards, it grows tax-free and you can do what you like with it.
How would you feel if you’d taken the government at its word on this for 20 years, only to be slapped with a last-minute tax bill?
Rosy and ready to believe the State has your back?
I didn’t think so.
3. £100,000 in ISAs doesn’t necessarily make you a fat cat
For many people, £100,000 is a fortune.
As the Resolution Foundation says, only 1.5m people have ISA holdings worth that or more, which sounds a lot until you realise that 27 million of us have ISAs.
However, Fools who invest for a secure retirement also know that £100,000 isn’t all that.
You’ll be familiar with the 4% rule. This (simplifying) predicts you can spend up to 4% a year of a sensible retirement pot with a very high chance of not running out of money before you die.
That equates to £4,000 a year from a £100,000 ISA.
Certainly, a handy top-up to your retirement spending. But an outrageous fortune? I don’t think so.
This is a relevant, given 72% of people with more than £100,000 in their ISAs are over 60.
The cap would mostly hit those either in or on the cusp of retirement, who have less time left to make other decisions about their money.
4. It would further inflate the property market
If Britain has a problem with middle-class wealth – and I’d argue it doesn’t, though perhaps it has an oligarch problem – it’s not to be found in stock market investing, or even in cash, given our low savings rate.
It’s glaringly a house price problem.
The UK stock market has been in the doldrums for years. But property prices are sky-high, with price-to-income ratios having outstripped wage growth for years. Many young people pay huge rents into their 40s, even as older people are reluctant to downsize and give up on this wealth-generation machine.
There are many reasons behind this, but the fact you pay no capital gains tax when you sell your own home is a big factor. Britain is mad for property. If we started taxing ISAs but left home sales tax-free, then I would bet next month’s mortgage payment that more money would go into inflating house prices instead.
5. It would encourage other poor financial decisions
Of course, many people with big ISA pots already own their homes. So, while some would-be ISA funds would be diverted into an extra bedroom or a bigger garden, other routes would be explored.
And when I say ‘routes’, I mean risky and expensive tax-saving alternatives like Venture Capital Trusts and EIS schemes at the respectable end – and potentially dodgy avoidance at the other.
Others would just spend more of their income now instead of saving. That would get more money into the economy I suppose, but it would be frittered on short-term consumer wants rather than long-term investment needs.
The UK’s Investor Forum group – representing institutional shareholders – just warned UK shares were no longer a ‘must own’ asset class. The lowly multiple of many UK equities attests to this.
Discouraging British investors from putting more money into the market won’t help.
6. It’s a penalty on success
We already have a curb on ISA wealth, with the annual contribution limit on the various ISA types.
Some very high earners do find it easy to fill this ISA allowance every year. But more of us strive to contribute what we can only after paying the mortgage and funding our pensions.
Even so, let’s say we achieve some investment success in our ISA. Maybe we stomached the stock market rollercoaster compared to sitting in the safety of cash for a couple of decades? Or perhaps we found a flair as stock pickers, or a knack for selecting winning fund managers.
Should we then be penalised for doing well, growing our portfolios, and hitting an arbitrary cap?
Should the government encourage staying in cash – or reward a bad investor who sees lower returns – by specifically singling out those who’ve done better? It seems almost vindictive.
7. It wouldn’t raise as much money as predicted
One reason for a cap is because you think there’s wealth getting away without being taxed. But like many tax-picking riches seemingly there for the taking, the Foundation assumes investors wouldn’t do anything different if ISA policy changed.
I’ve already argued they would. They’d put more into property, or spend more, or keep more in cash because why take the extra risk of shares just to get dinged for it?
Of course, you might (as the report implies) slap a tax on wealth already in ISAs today, via a retrospective raid.
But this would be so obviously damaging to faith in the savings system (see point #2) that even most think tanks would reject it as outrageous – let alone politicians seeking re-election.
So existing ISA pots would surely get some kind of special protection. Similar to when the Lifetime Allowance for pensions was brought in.
Which in turn would mean much less tax revenue being generated anyway, for all the pain caused.
8. It’s unfair to younger people
Continuing on that note, would it be fair that older savers could have amassed big ISA holdings subsequently ring-fenced from taxation, but for younger savers to enjoy nothing like the same-sized tax shelters in the future?
Obviously not.
People in their 40s, 50s, and 60s would have legacy tax-sheltered ISAs far greater than anything young people could aspire to, however responsibly they saved and invested.
9. Not all ISAs are created equal
Even if we take this policy seriously for a moment and imagine implementing it, why should all big ISA pots be treated the same way?
If you want to encourage a shareholder democracy or see UK companies enjoy higher valuations and access to capital, then why cap both cash and shares ISAs identically, when one helps your goals and the other doesn’t? And shouldn’t you at least try to distinguish between super higher-earners diverting a bit of their annual bonus to fill their cash ISAs, versus modest savers scrimping and investing for their 70s?
10. Low-income households don’t need enemies
I’m all for encouraging saving at all wealth levels. And I do think the Help to Save initiative that’s highlighted by the Resolution Foundation is sound.
That’s because Help to Save explicitly rewards the behaviour we want to encourage – saving – by delivering exactly what poorer people need: more cash.
But by the Foundation’s own figures, only 350,000 Help to Save accounts have been opened since 2016. That represents less than 10% of those who are eligible.
Maybe the other 90% are too beaten-down by the cost-of-living crisis to save at all?
In any event, I don’t see the take-up changing simply due to the creation of a more hostile environment for savers who are higher up the wealth spectrum.
Quite the opposite – just more cynicism about long-term saving for everyone.
Obviously, the Foundation argues the bounteous riches it sees flowing in from its draconian ISA clampdown would mean more resources to bolster Help to Save.
But even that’s an arbitrary connection. Governments can raise taxes from any source. Why not directly hike income tax or inheritance tax?
ISAs are already subject to the latter. Jack it up if you want to redistribute money from the wealthy.
ISA bad idea
I could go on (and on and on…)
This proposal exploits a laudable aim – encouraging more saving by poorer households – to smuggle in a toxic retrospective tax, which would betray a generation of savers.
And to what end?
Cash or equity investments are not like buy-to-let, where a landlord owning a one-bed flat potentially means one fewer property on the market for homeowners. In all but absurd extremes, one person’s nice-sized ISA isn’t curbing another’s bank balance.
Like all countries, we do have poorer households that need help, but this isn’t the way to do it. Not when it works against other public policy goals, such as encouraging people to provide for their old age, funnel more money into productive investments, and to fund other life goals, such as starting a business.
If something really has to be done to trim ISA expansion, then freeze the annual ISA allowance indefinitely or even reduce it.
That seems to me the only workable solution to curb the size of ISAs anyway, without creating a massive and expensive bureaucratic nightmare.
But really, the Chancellor should simply laugh this cap off his desk.
